RBI monetary policy more dovish than expected, comes as no surprise

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#Economy, #Expert Columns, policy announcement

The RBI kept its inflation forecast unchanged at 5.3 percent for FY22.

The Reserve Bank of India’s latest monetary policy turned out to be more dovish than expected and came with no surprises. The central bank kept its stance, policy rate and corridor unchanged and did little to provide any forward guidance on the path of future policy rate increases. This is in contrast to other global central banks that are turning towards tightening monetary policy.

The committee’s focus is clearly on supporting growth through sufficient liquidity and low interest rates despite street fears over inflation flare-up, global changes in interest rate policy and high commodity prices. The RBI of course can fine-tune the surplus liquidity to manage rates depending on the evolving situation.

Also read – RBI Monetary Policy: Here are the key announcements made by Governor Shaktikanta Das

Although improving, in absolute terms, the size of the economy is yet to surpass pre-pandemic levels in a meaningful way. However, since the last monetary policy there has been significant recovery visible from the high-frequency indicators and the vaccination rate has improved further. While keeping the faith in the growth momentum, the RBI also has retained the GDP projections at 9.5 percent for FY22.

The RBI noted that core inflation is an area of concern in view of input cost pressure that could rapidly be transmitted to retail inflation as demand strengthens. However, the reduction of excise duty and VAT on petrol and diesel could aid reduction in inflation by way of direct effects as well as indirect effects.

Also read – RBI Monetary Policy: What market experts are saying

The RBI kept its inflation forecast unchanged at 5.3 percent for FY22, signalling that it believes inflation to be more transient than permanent in nature. It expects CPI inflation to peak in Q4 FY22 and moderate thereafter. We think inflation prints could surprise on the upside and average at 5.5-5.6 percent for FY22, driven by elevated input and fuel costs and as the base effect wanes off. This could make prolonged elevated core inflation feed into household expectations impacting consumption.

Yields have moderated slightly post the RBI’s policy announcement. The central bank said that from January 2022 onwards liquidity absorption will be undertaken mainly through the auction route. We expect this to put further upward pressure on the short end of the curve.

If the Omicron variant turns out to be benign, the reverse repo rate may be hiked in February. One only hopes that the RBI is not falling behind the curve this time around.

Also read – RBI widens scope for digital money usage, increases UPI limits and ropes in feature phone users

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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