Monetary policy: RBI in wait & watch mode

While we may infer from experience that each subsequent Covid variant has had an incrementally less severe impact on economic activity, there are no guarantees with Covid. Additionally, with inflation becoming a political issue, Global Central Banks are retiring their belief in the 'transitory' nature of inflation

Mumbai: The RBI, which will be reviewing its annual monetary policy on December 8, is likely to remain on a wait-and-watch mode, says a study.

However, few other experts are of the view that the RBI may shed its accommodative stance and go for hike in reverse repo rate by 15-20 basis points (bsp).

The growth numbers are unlikely to be significant for the RBI's policy setting given its Q2 estimate at 7.9 per cent. With uncertainty around the new Covid variant, the RBI would possibly wait for some clarity before moving decisively on rates.

"We maintain our call for a reverse repo rate hike in February with the December meeting remaining a close call. We expect the RBI to continue on its path of normalization with the reverse repo rate hike in February policy and repo rate hike in the middle of the next fiscal 2022-23," says Suvodeep Rakshit of Kotak Economic Research.

In contrast, another school of thought is of firm belief that the RBI may go for a hike in reverse repo rate, that too by 15-20 bsp.

Lakshmi Iyer, CIO – Debt & Head – Products, Kotak Mahindra Asset Management, says, "As the cobwebs being to clear with respect to policy making front, world central bankers are grappling with the debut of the Omicron variant of Covid virus! The path to normalisation has begun across the world, including India, and is less likely to stop for now."

She added, "We therefore expect a reasonably high chance of 15/20bps hike in reverse repo rate – a start to reduce the gap between repo and rev repo rate. The policy stance may remain status quo and hinge on incremental developments in the near term. We expect variable rate reverse repo (VRRR) as a tool to normalise liquidity to continue to gain momentum."

Yet again, the Virus has mutated, and with it, permutations for December RBI policy is likely. While we may infer from experience that each subsequent Covid variant has had an incrementally less severe impact on economic activity, there are no guarantees with Covid. Additionally, with inflation becoming a political issue, Global Central Banks are retiring their belief in the 'transitory' nature of inflation.

Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance says, "In contrast the near-term Indian CPI is likely to remain within the MPC target band of 4 to 6 per cent. This, in turn, should give the MPC time to assess the medium-term implications of Omicron by continuing to maintain an accommodative pause in policy rates in December. We, however, expect RBI, he added, to continue normalizing high banking system liquidity by further adjusting quantum and tenor of existing VRRR operations.

Interest Rates markets have re-aligned to this new reality and expected to remain range bound around current levels in the absence of a policy surprise.