The Reserve Bank of India's (RBI) buffet seems to be never-ending.
Heading into Governor Shaktikanta Das' address at 10 am on February 10, it was felt that the central bank could not hold off on a reverse repo rate hike any longer.
But what do the markets know?
"Sometimes markets expect dessert but then realise that the main course is still not over," noted Aurodeep Nandi, Nomura's India economist.
The main course is indeed still on. The monetary policy committee (MPC) left the policy repo rate unchanged at 4 percent, and the RBI made no change to the reverse repo rate of 3.35 percent. The record low interest rates will remain for a while longer, then.
As has been the case for several months now, five of the six MPC members voted to retain the accommodative stance "as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward".
Going by the RBI's latest inflation forecast, the MPC's stance is going to remain accommodative until the end of FY23.
As per the forecast, Consumer Price Index (CPI) inflation is seen averaging 4.5 percent in FY23, down 80 basis points from 5.3 percent in FY22. The quarterly forecasts provide more clarity on the evolution of India's inflation: 5.7 percent in Q4FY22, 4.9 percent in Q1FY23, 5.0 percent in Q2FY23, 4.0 percent in Q3FY23 and 4.2 percent in Q4FY23.
Not everyone is convinced by these numbers.
According to Nomura's Nandi, the RBI's "very dovish outlook for inflation" for FY23 is odd considering the higher oil and commodity prices, growth-supporting fiscal policy, continued economic normalisation, and the US Federal Reserve turning distinctly hawkish.
| CPI INFLATION FORECASTS: RBI VERSUS PROFESSIONAL FORECASTERS | ||
| RBI | Professional forecasters | |
| FY22 | 5.3% | 5.4% |
| Q4 FY22 | 5.7% | 5.8% |
| FY23 | 4.5% | 5.0% |
| Q1 FY23 | 4.9% | 5.1% |
| Q2 FY23 | 5.0% | 5.2% |
| Q3 FY23 | 4.0% | 4.7% |
| Q4 FY23 | 4.2% | - |
The dovish nature of the RBI's inflation forecast—several economists see CPI inflation averaging 5 percent next year—is critical as it gives the MPC time to wait for growth impulses to broaden and manage rate expectations.
"It's likely that RBI is trying to buy time and focus on managing rates expectations for the remaining two months of the current fiscal year for now," noted Rajni Thakur, RBL Bank's chief economist.
"The signalling is quite clear in this meeting that despite global rates inching up and upside risks on inflation levels, RBI will tilt towards dragging its feet on rate normalisation well into the next fiscal year as well while continuing with its liquidity management steps," Thakur added.
As is the case with the inflation forecasts, not everyone is convinced the RBI will leave the repo rate alone in the near term. Dharmakirti Joshi, CRISIL's chief economist, expects a 25-basis-point repo rate hike in April itself, followed by another 50 basis points worth of rate hikes such that 2022 will end with the repo rate at 4.75 percent.
The RBI may still be serving the main course, but a few are already making for the banquet hall's exit doors in anticipation of the food and the punch bowl being taken away rather quickly.
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