Analysis| Omicron uncertainty puts Das & Co in slow gear; back to the waiting game

Reserve Bank of India (RBI) Governor Shaktikanta Das

There were no real surprises in Wednesday’s monetary policy committee (MPC) announcement. Amid the continuing uncertainty on the growth front, which is the key concern for the Reserve Bank of India (RBI) at this point, no economist predicted a change in the key lending rate, the repo. The RBI has clearly hit the pause button on its path towards policy normalisation. There were economists who were betting on an increase in the reverse repo rate in the December review.

The repo is the rate at which the central bank lends short-term funds to banks. Reverse repo is the rate at which it sucks out excess money in the market.

The RBI chose not to up the reverse repo probably to signal that the central bank wouldn’t want to take a risk on the growth front amid reports of a resurgence in Covid cases with the new Omicron variant. Omicron found mention in the RBI governor’s statement more than once as factor that has considerably added to the existing uncertainty in the global markets.

The Omicron variant, as Moneycontrol highlighted in an earlier column, will play a crucial role in the RBI’s course on policy normalisation, going ahead. But if it isn’t as big a worry as feared, the MPC could hike the reverse repo in the February review, resuming the path to policy normalisation.

During the post-policy press conference, RBI governor Shaktikanta Das made it abundantly clear that recovery in growth is the predominant focus of the MPC. “Let me reiterate that we remain committed to our stance in support of our overarching priority at this juncture to broaden the growth impulses while preserving monetary and financial stability,” Das said.

In a note issued on Wednesday, Morgan Stanley said it expects the February policy will likely mark the start of policy normalisation with a reverse repo rate hike. However, it anticipates the lift-off and its quantum to be contingent on the impact of Omicron on economic activity, the note said. “If the growth momentum remains durable, we would then expect that the RBI could choose to hike the reverse repo rate 40bps (basis points) to adjust the policy rate corridor in one shot. Next, we expect this to be followed by a hike in the repo rate in the April  policy review, with a cumulative rise of 150bps in F2023. The policy rate path is driven by a robust recovery in growth,” Morgan Stanley said.

As far as the policy stance is concerned, the MPC once again proved to be a divided house with one member voting against it. To sum up, Omicron has proved to be a factor that has forced the MPC to slow down on the projected path of policy normalisation. Between now and the February review, the evolution of the Omicron trajectory will decide the course of MPC’s policy approach.