RBI likely to maintain status quo in policy rate next week, say experts

In view of inflationary concerns, the Reserve Bank is likely to maintain the status quo on key policy rates in its next bi-monthly economic policy, which will be the first after the presentation of the Union Budget for 2022-23.

Experts, however, are of the opinion that RBI's monetary policy committee (MPC) may change the policy stance from 'accommodative' to 'neutral' and tinker with the reverse-repo rate as part of the liquidity normalisation process.

The next bi-monthly monetary policy is scheduled to be announced on Wednesday at the end of three-day deliberations of the MPC beginning Monday.

Madan Sabnavis, Chief Economist, Bank of Baroda, said given the assurance on growth as per the budget and the possibility of inflation rising mainly due to crude oil, ''we expect the RBI to start the process of normalisation by increasing the reverse repo rate by 25 bps''.

There will be no change in the repo rate this time even though a 50 basis points hike is expected next year, Sabnavis said adding there could be a slight downward revision in the GDP growth rate for FY22.

''Will there be a change in stance? Probably not this time thought the hike in reverse repo rate will send signal of future direction of rates,'' Sabnavis opined.

Shanti Ekambaram, Group President, Consumer Banking, Kotak Mahindra Bank, said amidst global inflation pressures, tightening monetary policies by global central banks, high oil prices, domestic inflation, and the sharp rise in domestic yields, the MPC will have a tight rope-walk as they discuss the monetary policy stance and interest rates in the coming week.

''Given that the overnight call rate is closer to 4 per cent, we expect the RBI to change the reverse repo rate by up to 25 bps or make repo the operative rate. While a repo rate hike is not expected, it is possible that the MPC might change its stance to neutral from accommodative,'' Ekambaram said.

On her expectations from the MPC, Shruti Aggarwal, co-founder, Stashfin, said India's GDP growth, which is estimated at 9.2 per cent for 2021-22 will be one of the fastest globally. To maintain and achieve this rate of growth, it'll be challenging for the government to balance upward inflation as well as the risks associated with uncertainty around COVID and oil prices.

''With COVID appearing to abate, an increase in demand can be forecast. A hike in interest rates that keeps inflation around 6 per cent should help in driving liquidity. A clear strategy on inflation and liquidity should further lead to increase in investments. We are optimistic on the economy growth,'' said Aggarwal.

The last MPC held in December 2021 had kept the benchmark interest rate unchanged at 4 per cent and decided to continue with its accommodative stance against the backdrop of concerns over the emergence of the new coronavirus variant Omicron. It was the ninth time in a row that the rate setting panel had maintained the status quo.

Aditi Nayar, Chief Economist, ICRA, expects a status quo this time from the MPC. According to her, policy normalisation is set to commence in April with a stance change and reverse repo hike. ''Subsequently we see two 25bps repo hikes over the next two reviews,'' she added.

Arvind Chari, CIO, Quantum Advisors opined that with the government well and truly accepting the mantle of reviving growth, the RBI no longer needs to prioritise growth over inflation. Their current stance of 'accommodative policy for as long as necessary to revive growth' needs to be changed.

Given that the economy has recovered and does not need lower rates or higher liquidity, the MPC should change its monetary policy stance to neutral, Chari said.

The Reserve Bank has been tasked by the government to keep the interest rate in the range of 2-6 per cent.

State-owned Bank of Baroda in a research note said inflation remains worrisome. An uptick in Consumer Price Index inflation has been observed lately as it climbed up to 5.6 per cent in December 2021 from 4.9 per cent in November 2021.

Given the spike in crude oil prices, along with increase in global commodity prices, these factors are likely to impinge on inflation. Further, once the state elections are over, inflation is expected to increase further as fuel prices are changed, it said.