Will RBI really raise reverse repo rate as the market is expecting?

Will RBI really raise reverse repo rate as the market is expecting?

Abheek Barua

Chief Economist, HDFC Bank

He is responsible for the ALCO (asset-liability committee), treasury and other businesses that would require the expertise in economic research and financial analysis. He has strong academic and professional background and brings in wealth of expertise, having worked with SSKI Securities, Merrill Lynch Asian Economics Team and CRISIL.

We expect RBI to retain its accommodative stance without any increase in the reverse repo rate, currently the effective policy rate. The amount of the GSAP for Q3 could be reduced with the provision that it could be revised up when required. Moreover, the RBI could continue to sterilise its GSAP purchases going forward to keep the impact of its yield management tools liquidity neutral.

GDP forecast to remain unchanged, Inflation forecast likely to be revised down: The RBI is likely to revise down its inflation forecast for Q2 FY22 (last RBI’s forecast: 5.9 per cent) and for Q3 FY22 (last RBI’s forecast: 5.3 per cent) projected in the last policy meeting in Aug-21 due to lower food prices. We expect inflation to average at 5.1 per cent in Q2 and 4.8 per cent in Q3 FY22. For FY22, we expect inflation to average at 5.35 per cent.

Our rationale:

  • Global risk particularly from the China “shock”, the US Fed taper and apprehensions about the US debt ceiling not getting raised have escalated.
  • These would have supply side effects for industrial intermediates and fuel as well as demand side manifestations as global growth is likely to slow down
  • US yields have risen sharply with a knock-on effect on domestic yields.
  • As the US taper gets under way, there could be an outflow of capital affecting domestic liquidity.
  • Domestic output gap remains high and capacity utilization in the majority of industries is below 75 per cent.
  • Household and SME balance sheets are impaired and are best repaired under low interest/high liquidity conditions

Thus, the balance of risks calls for holding action and continuation of the accommodative stance.

(Abheek Barua is Chief Economist at HDFC Bank. Views are his own.)

About Author

Related posts