Informist, Monday, Aug 2, 2021

NEW DELHI – The Monetary Policy Committee is expected to leave the repo rate unchanged at 4.00% on Friday, although it may be forced to sound warnings on inflation and raise its forecast following an unexpectedly high print a couple of months ago.

All 25 economists, treasurers, and mutual fund managers polled by Informist expect the Reserve Bank of India's rate-setting panel to make no change to the policy rate or the accommodative stance at the conclusion of its three-day meet, which begins Wednesday.

"In our view, the Monetary Policy Committee will increase its emphasis on inflation risks in the meeting, albeit staying focused on growth due to risks surrounding a third wave," said Kanika Pasricha, an economist at Standard Chartered Bank.

"While we do not expect any revision in growth projections, the 2021-22 inflation forecast of 5.1% is likely to be raised given the surprise print in both May and June of 6.3%."

CPI inflation unexpectedly jumped to 6.30% in May from 4.23% in April. While the number eased marginally to 6.26% in June, the sharply-higher-than-anticipated figure for May led most economists to raise their forecasts for 2021-22 (Apr-Mar) by 40-50 basis points to around 5.5%.

The RBI's June forecast saw CPI inflation averaging 5.1% this year. In Apr-Jun, CPI inflation averaged 5.6%--40 bps higher than what the central bank expected.

The latest forecasts see CPI inflation averaging 5.4% in Jul-Sep, 4.7% in Oct-Dec, and 5.3% in Jan-Mar.

The jump in inflation in May led the RBI to act towards keeping expectations in check.

"Governor Shaktikanta Das--clearly busy with media duties over the past few weeks--recently said in a separate interview that 'a sudden change to the monetary policy approach can have serious consequences for the economic recovery'. This suggests to us that policy withdrawal will be gradual," noted Shilan Shah, a senior India economist at Capital Economics.

Das gave two interviews in July--one before and the other after CPI data for June was released on Jul 12--in which he stressed the current spike in inflation was "transitory".

However, not everyone is convinced.

"Recent comments from Governor Das that not just talked about need to prioritise growth but also underplayed inflation risks have fuelled market expectations of a long delay in normalisation process," a report by ICICI Securities Primary Dealership said last month.

"We would however fade those comments to some extent. For one we think the comments likely do not represent the majority view in the MPC going by the past minutes. For another, the Governor may have wished to ward off any talk of imminent change to either rates or policy stance."

Although the committee's decisions have been unanimous for a while, recent months have seen signs of cracks appearing during their discussions. The minutes of the June meeting showed multiple members of the committee concerned about inflation expectations settling at elevated levels.

The findings of the RBI's latest Households' Inflation Expectations Survey, which were curiously not mentioned in the committee's statement in June, revealed the median inflation perception had shot up by 150 bps from March to 10.2%. Further, three-month and one-year-ahead inflation expectations were both up 70 bps from March at 10.8% and 10.9%, respectively.

Despite the visible risks, economists are in broad agreement that this week's statement would be too early for the committee to set the ground for beginning the next phase of the policy normalisation process, which will likely include a hike in the reverse repo rate and withdrawal of some surplus liquidity.

"We expect the RBI to follow a relatively quick normalisation cycle, but the time to signal this change of course is in the future, not the present" said Rahul Bajoria, chief India economist for Barclays.

However, according to ICICI Securities Primary Dealership, it would be prudent for the RBI to start providing "soft signals" this week itself if it wanted to prepare markets for the start of the normalisation process later this calendar year.

The following are expectations of respondents regarding the likely rate action by the Monetary Policy Committee on Friday:

End

Reported by Siddharth Upasani

Edited by Snigdha Kuttikat

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