Inflationary pressures are likely to be higher in the next few quarters - Acuite Ratings

Mr. Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research comments on MPC Dec 8, 2021

"While we had expected a partial likelihood of a modest hike in reverse repo rate in the Dec-21 MPC policy meeting, the central bank has stuck to its principle of 'gradualism' since the downside risks to a durable growth trajectory have clearly increased due to the spread of a new Covid variant. MPC has retained the FY22 growth forecast at 9.5% but has slightly reduced the Q3FY22 GDP forecast to 6.6%, reflecting concerns on the global growth uncertainty along with high commodity prices.

What is worthwhile to note is RBI's dovish stance on inflation; although it has highlighted its concerns on the high core inflation levels and the input cost pressures, it has continued to retain its average headline CPI forecast at 5.3%. RBI continues to take comfort from the tax cuts in retail fuel and the steps that the government has taken to moderate prices in food categories such as edible oil and pulses. We, however, believe that the inflationary pressures are likely to be higher in the next few quarters if consumption demand picks up in a steady manner, given the expectations of continuing supply constraints in some sectors.

RBI, nevertheless, has continued to focus on 'rebalancing of liquidity' as was expected. VRRR auction will continue to be the primary tool for liquidity management and the auction amounts are set to go up higher to Rs 6.5 lakh Cr - Rs. 7.5 lakh Cr in Dec-21. At the same time, the auctions will have a higher proportion of 28 days vis-à-vis the primary tenor of 14 days. Slightly more steps have been taken to normalize the excess liquidity by reducing the additional quantum that was eligible under MSF. Further, banks have been permitted to prepay any their TLTRO withdrawals to optimize their liquidity position. Interestingly, there has been no guidance on the rate trajectory, even on the reverse repo front. This makes it difficult for us to predict the next steps on the yield front."

Source : Equity Bulls

Keywords

AcuiteRatings InflationaryPressure MPC StatusQuo