LIVE: RBI Monetary Policy Expectations, Preview - What MPC may announce after meeting

Boman Irani - President- Credai MCHI

"While the Indian economy is charged and on is on its way towards normalcy, we still have a long way to go, to achieve the goals of development and meet the growth rate projected by world bank for India. CREDAI-MCHI expects and urges the RBI to continue to hold the repo rates at the current levels and not increase the same for at least the next 2-3 quarters. 

A low home loan interest rate has acted as a catalyst to help revive not just the real estate sector but more than 251 ancillary industries associated with the real estate sector. It is important that RBI maintains the repo rate at the the current level to keep these industries and the economy continued at its recovery and revival mode. I recommend that customers take advantage of the low home loan rate of interests and invest into real estate at the earliest. This recommendation is because I see an inevitable price hike impacting the real estate sector due to increase in raw material costs.’

CREDA-MCHI would also request the government and RBI to come out with schemes and recommendations to boost the commercial real estate sector on the similar lines as the low rate of interest for home loans have pushed the residential sector to the forefront in the last couple of months."

No easy choices but play judiciously with mix and match of tools - Emkay Global

In all, there will be no easy policy choices for the RBI this year. Following the global/DM suit on policy rates without considering domestic dynamics may not be an optimal policy action, especially as

1) the economy has built external sector buffers in case of global disruptions, and

2) the interest rates market has so far largely borne the impact of changing global dynamics.

Even at the cost of conflicting signals, the delicate balancing act of slow policy normalization will come with:

1) A formal mild hike in fixed RR to normalize the corridor amid high variance in money markets, but still keeping a wait-and-watch tone.

2) Stance remaining accommodative with RBI treading carefully on the path of liquidity normalization going ahead, by letting automatic stabilizers, like credit offtake, CIC, FPI flows
direction etc. lead the path

3) Cognizance of OMO purchases support in H1FY23, even with possible fiscal revenue surprises and delayed but not denied JPM GBI entry of India bonds

4) Cognizance of not sending confusing policy signals, implying the supports could even be liquidity neutral (CRR hike +OMOs)

5) Also, letting the exchange rate adjust to the new realities and letting it act as a natural stabilizer to growth and policy reaction functions

Shruti Aggarwal, co-founder, Stashfin

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.

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.

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.

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 rupee declined by 10 paise to close at 74.84 against the US dollar on Wednesday amid persistent foreign fund outflows and elevated crude oil prices. Investors are cautious ahead of the RBI monetary policy to be announced on Thursday, analysts said.

RBI MPC Preview: No easy choices but play judiciously with mix and match of tools: Emkay Global

"In all, there will be no easy policy choices for the RBI this year. Following the global/DM suit on policy rates without considering domestic dynamics may not be an optimal policy action, especially as 1) the economy has built external sector buffers in case of global disruptions, and 2) the interest rates market has so far largely borne the impact of changing global dynamics. Even at the cost of conflicting signals, the delicate balancing act of slow policy normalization will come with:-

1) A formal mild hike in fixed RR to normalize the corridor amid high variance in money markets, but still keeping a wait-and-watch tone.

2) Stance remaining accommodative with RBI treading carefully on the path of liquidity normalization going ahead, by letting automatic stabilizers, like credit offtake, CIC, FPI flows
direction etc. lead the path

3) Cognizance of OMO purchases support in H1FY23, even with possible fiscal revenue surprises and delayed but not denied JPM GBI entry of India bonds

4) Cognizance of not sending confusing policy signals, implying the supports could even be liquidity neutral (CRR hike +OMOs)

5) Also, letting the exchange rate adjust to the new realities and letting it act as a natural stabilizer to growth and policy reaction functions."

Lakshmi Iyer, CIO (Debt) & Head - Products, Kotak Mahindra Asset Management Company

“After a shocker for bond yields post budget, all eyes are now on the MPC meet. Given the mammoth borrowing for FY23 , there are hopes for RBI to Announce OT(operation twist) which could act as an anchor to long term bond yields. We expect reverse repo rate to be hiked with other rates unchanged. We do not expect any major tweaks to GDP or inflation forecasts.”

RBI Monetary Policy Feb 2022: Preview by Emkay Global - Key highlights:

- Fair possibility of 15-25bps Reverse repo hike but all eyes will be on guidance ahead

- Management of still-high liquidity deluge while supporting bonds will be a challenge

- Regulatory forbearance for banks’ HTM bucket may be extended

- OMO + CRR hike combo will also face communication challenge

RBI Monetary Policy Feb 2022: Preview - Emkay Global

"Higher term premia to impede with policy intent of durable growth."

Recent auction cancellations due to high GOI cash balance could help soothe market nerves, but a huge supply next fiscal (even with some upside surprise on revenue stream) will require the RBI’s invisible hand in a more visible fashion, implying return of a pre-committed GSAPs. This, however, will interfere with the RBI’s aim of liquidity normalization, balance sheet preservation and a possible change in stance and repo hike(s) ahead, starting with a fixed RR hike. Conversely, a further increase in term premia could percolate to credit markets and impede the policy aim to push trend growth by encouraging private capex.

RBI Monetary Policy Feb 2022: Preview - Emkay Global

"Who bears the cost of fiscal/external sector dominance of monetary policy -- Rates or FX markets?"

Emkay Global says, "We note that the macro adjustment owing to a change in global and domestic dynamics (US rates repricing, Brent surge, sharp FPI outflows, twin deficit, etc.) has so far been borne by the rates market, while the exchange rate market has been resilient (Ex. 16-18). Though this risks a catch-up impact on the FX market in coming months, this could also imply the blowup in the rates market could ease. While the rates market has historically been responsive to the fiscal stance and monetary policy anchors, specifically inflation, supply management by the RBI in the past has been a key player in determining the market clearing price (Ex 9). Near-term inflation risks are real: 1) a $10/bbl increase in oil raises CPI
inflation by ~35bps; 2) slow fiscal consolidation even with capex-led spending and penal taxes on imported manufacturing/capital goods products could be near-term inflationary. Besides, revert of fiscal dominance of monetary policy will put the RBI in a catch-22 state just when it commenced (orderly) normalization. 

RBI Monetary Policy Feb 2022: Preview - Emkay Global

"…However, the communication (and action) channel is easier said than done, says Emkay Global

"The journey from current Rs6.5tn+ system liquidity to a pre-Covid normal of Rs 2tn+ is still going to be long-drawn. This implies unease with regard to the co-existence of liquidity/policy normalization, and accommodation is likely to persist. This also comes on the back of still-divided growth-inflation trade off debate in an economy that 1) is still running sub-par and has missing levers of durable growth, 2) may face upside pressure due to inflation in H1FY23 (RBI’s forecast 5%) with consistently surging Brent prices (up 20% since mid-Dec) despite tighter global rates, 3) the return of twin deficit pressure, and 4) upside surprise on market borrowings (Rs11.2tn - 67% of fiscal deficit) combined with risk of delayed GBI inclusion amid no change in FPI capital gains tax in the budget. That said, changing global financial dynamics may require the MPC to be vigilant on the rates front and respond judiciously to keep risk premia adequate for FPIs. All of this means that the term premia is already near an all-time high as the Gsec market shows nervousness around impending policy actions and a possible supply-demand mismatch in the absence of RBI. Against this backdrop, even a reverse repo hike or a stance change could disturb the market further. Thus, cautious policy treading and communication will be the key."

RBI Monetary Policy Feb 2022: Preview - On face of it, a fixed reverse repo hike looks to be a formality, says Emkay Global

"The RBI’s second tryst with liquidity repricing using VRRRs has been relatively smoother amid better communication. Money market rates have generally risen well in line with higher weighted RR. This was partly also led by some normalization in liquidity (down to Rs6.5tn+ from Rs8.5tn+ in Dec’21 policy) owing to an increase in currency in circulation amid limited GOI drawdown in surplus, OMO secondary sales since Oct’21 (Rs240bn), FPI outflows (US$10.8bn since Oct’21) and higher trade and BoP deficit. Besides, the RBI appears to have partly rolled over its heavy load of maturing long FX forwards -- partly explaining high forward rates. With money markets aligning with new realities, a formal hike in fixed RR by 15-25bps looks more like a formality, especially with 1) a limited macro impact from Omicron, 2) upside risk on inflation, with Brent comfortably above $90/bbl, and 3) high variance in the call money rate amid such a wide policy corridor and with TREPS still hugging the lower end of the corridor." 

RBI Monetary Policy Feb 2022: Preview - Emkay Global

"The macro adjustment owing to changing global and domestic dynamics has so far been borne by the rates market while the FX market has been resilient. Amid ultra-elevated term
premia, India’s current real rates look reasonable vs. EMs, given the present crosscurrents. This could give some leeway to the RBI’s reaction function to conduct shallow normalization."