Expect eventual hike in the benchmark repo rate in Q1FY23 - MPC Expectations - Acuité Ratings

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research comments on expectations from Oct'21 MPC

"Acuité believes, in line with market expectations, that RBI will continue with its accommodative monetary policy in Oct'21 although it is likely that it may take some further steps to recalibrate the excess liquidity in the monetary system over the next 1-2 quarters.

While the high frequency indicators for the month of Aug-Sep'21 reveal that economic activity is reaching its pre-pandemic levels and the risks of another wave of the Covid are gradually on a decline, the recovery momentum is still uneven and not well anchored across all sectors of the economy.

Further, unlike most developed and peer nations, the headline CPI inflation in India has moderated in Jul-Aug'21 due to lower food inflation and the short term outlook on inflation remains benign. While the spectre of high crude oil prices will continue to hold up the inflation risks, the latest inflation data will provide some relief to the MPC.

Globally, the combination of elevated commodity prices, Covid related disruptions, vaccination progress, and policy support led economic revival have resulted in an acceleration in inflation in most of the developed and developing markets. This has started to lead to expectations of a readjustment in monetary policy. Nevertheless, systemically important central banks have so far treated the rise in inflation as 'transitory', while continuing to focus on supporting growth recovery. Increasingly, however, the central banks like the Federal Reserve in US have taken a stance to moderate surplus system liqudity in a gradual manner through a tapering of their aggressive bond purchase programmes instead of initiating interest rate hikes.

We believe that RBI will also adopt a similar approach over the next 2 quarters to optimise the systemic liquidity position before considering any rate hike. With steady progress on vaccination and the pickup in aggregate demand, we expect RBI to start normalizing the policy corridor from Dec-21 onwards through a reverse repo rate hike. This is likely to be followed by an eventual hike in the benchmark repo rate in Q1FY23. We continue to stick to our 10Y g-sec yield forecast of 6.50% by Mar-22."

Source : Equity Bulls

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