HDFC Bank Chief Economist Abheek Barua stated that the RBI is likely to increase the repo rate by 20 bps in this monetary policy meeting. Barua added that the RBI is also likely to retain the GDP growth forecast at 9.5 per cent. The RBI policy meeting that is currently underway comes against the backdrop of uncertainty following the emergence of the Omicron variant.
The economist stated that Omicron is likely to put a brief pause to RBI’s normalisation plans but does not expect the plans to be jettisoned completely.
“We expect the RBI to increase the reverse repo rate by 20 bps (currently at 3.35 per cent) in the upcoming meeting. We expect the central bank to keep its stance accommodative and continue to manage liquidity through VRRRs (possible further extension of tenures from 28 days) and other market related instruments. The announcement of a more permanent liquidity absorption facility like the SDF is unlikely in the upcoming policy,” said Barua in a statement.
He said the high probability of a reverse repo rate hike comes due to increasing inflationary concerns, signs of growth picking up, and normalisation (liquidity and rates) since October policy is already underway.
Barua said that the lender expects the impact of Omicron to be managed and hence the drag on growth is likely to be contained. “As a result, we do not expect global tightening plans to be derailed and expect normalisation to continue, but perhaps with a more cautious pace adopted by the RBI. We cannot rule out the possibility of the RBI holding off on its reverse repo hike plan (for another two months) and going slow on liquidity normalisation, erring on the side of caution at its upcoming policy,” he said. If the virus is found to be more virulent than current expectations then central banks and government could find themselves reversing tightening plans, he added.
“We expect the RBI to keep its growth forecast unchanged at 9.5 per cent, although sounding cautious on the Omicron risk. On inflation, we expect an upward revision in Q3 FY22 forecast from 4.5 per cent (last policy) by 50-75 bps and Q4 FY22 forecast from 5.8 per cent by 30-40bps,” Barua estimated.
Policy normalisation is likely to continue in the February meeting with a further increase in reverse repo to normalise the policy corridor, he said, further adding that RBI could change its stance from accommodative to neutral. “We expect the RBI to increase its repo rate in the April or June policy 2022,” he added.
The 10-year bond yield is expected to trade close to 6.40 per cent by December-end and 6-4- 6.5 per cent by March-end.
Also read: MPC meet starts today: RBI likely to keep key policy rates unchanged