Moneycontrol PRO
Upcoming Webinar:Join us for 'The Future Techshot' on Sept 22, 10:30am to gain insights into role of tech in streamlining businesses. Register Now!

Higher inflation a transitory hump, to help RBI remain dovish in August review: Report

The Reserve Bank-led monetary policy panel is scheduled to announce the third monetary policy review on August 6, amidst the continuing spike in retail inflation that has breached the 6 percent upper tolerance level for the past two consecutive months.

July 26, 2021 / 06:08 PM IST

Describing the recent two consecutive spikes in retail inflation beyond the 6 percent as a 'transitory hump', a Wall Street brokerage on Monday said it expects the RBI to overlook it and unanimously stick to the dovish stance at the forthcoming policy review, even though a further upward revision of its already-revised inflation target is more likely.

The Reserve Bank-led monetary policy panel is scheduled to announce the third monetary policy review on August 6, amidst the continuing spike in retail inflation that has breached the 6 percent upper tolerance level for the past two consecutive months.

"We expect the MPC to stick with a dovish pause in the August 6 policy, overlooking the 'transitory hump' in inflation. Thereafter, the normalisation path will depend on the evolution of growth, inflation and the pandemic. The governor is likely to reiterate a dovish message and argue against a hasty withdrawal of monetary policy support," Bank of America Securities India house economists said in a report.

But they were quick to warn an abnormally high crude prices may force the RBI to adapt to normalisation process sooner than later.

The repo rate has been at record low of 4 percent since June 2020, after lowering it by 115 bps during the first half of the pandemic-hit year, and the reverse repo, which has become the effective rate given the surplus liquidity, at 3.35 percent, after it was slashed by 155 bps during the same period, resulting in an asymmetric +25/-65 bps policy corridor.

Close

The MPC is likely to revise up its FY22 average CPI inflation forecast slightly from the previous 5.1 percent and flag potential upside risks. On the other hand, the MPC is also likely to retain the FY22 real GDP growth forecast at 9.5 percent, with risks evenly balanced now.

On policy normalisation, the report said if there is no hard-hitting third wave but yet a sizeable outbreak occurs, the RBI is likely to meet its growth and inflation forecasts first.

In this scenario, both growth and inflation stay largely in line with RBI estimates. Then the RBI will continue to ramp up its variable rate reverse repo operations till the December quarter and even as it narrows the policy corridor to a symmetric 25 bps plus/minus.

"We see the monetary policy turning to a neutral stance after Q2 of 2022, and repo rate hike beginning either in June or August 2022 policy review, post which there will be a calibrated tightening, taking the repo to 5 percent by March 2023 and 5.5 percent by December 2023," said the report.

In case both growth revival and spike in inflation are sharper than expected, the normalisation process will be advanced by a quarter or two wherein the corridor will be normalized by end-2021, with RBI turning neutral in Q1 of 2022, yet the first repo hike will be only in Jun or August 2022.

But if growth is slower than expected and inflation is uncomfortably high, then RBI will be in a tricky spot. However, if elevated inflation is due to supply side issues, we expect the RBI to stick to its growth focus, said the report.

But if there is a hard-hitting third wave, the report expects normalisation to be advanced further to Q4 of 2022, and begin to repo hike only from early 2023 and normalisation by December 2023 when it will be at 5 percent.
PTI
first published: Jul 26, 2021 06:07 pm

stay updated

Get Daily News on your Browser
Sections
ISO 27001 - BSI Assurance Mark