Economists see rate tightening from next review on inflation woes

Economists and analysts have pencilled in liquidity tightening from the February policy by a reverse repo hike and a likely repo rate hike in March/April as they believe inflation pressures to surprise on the upsides and have termed as "unexpected" the more-than-expected dovish policy stance to support growth.

While Crisil economists expect a hike in the reverse repo rate in February next to narrow the corridor with the repo rate to 25 bps from the present 65 bps and a 25 bps repo rate hike in March 2022, Abheek Barua of HDFC Bank sees the policy normalisation to get a leg up in the February meeting with a reverse repo hike if the Omicron virus is managed.

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A change in stance is likely in April from accommodative to neutral and a repo rate hike by June or August policy 2022, Barua said predicating his cautious outlook to inflation crossing the RBI forecast by a wide margin.

Describing the December policy review as "more dovish as compared to our expectations," as the central bank did little to provide any forward guidance on the path of future policy rate increases but asserting that the paramount policy focus in supporting growth.

"This is in contrast to other global central banks like the US Fed that are turning towards tightening monetary policy. The policy decision today tilted on the side of caution, continuing its support for growth and sounding caution on the omicron risk," Barua said.

On inflation, he said while the RBI expects inflation to remain unchanged at 5.3 per cent by March, signalling that it believes inflation to be more transient than permanent in nature.

"But we do not see the inflation trajectory to be as benign and expect inflation prints to surprise on the upside and average at 5.6 per cent for FY22, driven by elevated input and fuel costs and as the base effect wanes off. The risk of prolonged elevated core inflation feeding into household expectations and becoming more entrenched in the system remains and trend over 6 per cent from this month," he warned.

On the policy impact on the Gsec yields, which moderated after the policy announcement to 6.36 per cent from 6.39 per cent on Tuesday and 38 per cent before the policy announcement, he expects the 10-year bond yield to trade close to 6.35-6.40 per cent by December-end and 6-4-6.5 per cent by March-end.

Crisil said the more dovish stance was based in the steady but uneven economic recovery. "Due to these factors, we expect the RBI to continue the calibrated normalisation in the coming months."

Brickwork Ratings despite the all-out support for growth, the policy signals the continuation of its gradual move towards normalising its monetary policy, as is visible from capping MSF at 2 percent of the NDTL from 3 per cent, from January 1, 2022.

British brokerage Barclays said the central bank today paused the normalisation process that began in October and indicated it will maintain a growth-centric normalisation of the policy. The brokerage was expecting a 20 bps increase in the reverse repo rate this month.

The MPC position is highly accommodative, and even though the RBI has prepared the ground for a very modest exit from its highly accommodative policy stance, the brokerage expects the central bank to keep growth risks front and at the centre of its deliberations.

The brokerage also expects repo rate hikes in Q2 and Q3 of 2022, as it sees inflation staying above 5 per cent over the forecast horizon.

Radhika Rao of the Singaporean lender DBS said RBI has underestimated the inflation risks, which according to her cannot be dismissed ?as the pullback in September-October inflation print is expected to be short-lived and CPI inflation to edge past the upper end of the RBI's target range into early 2022, lifted by volatility in perishable food items, telecom price hikes, sticky inflationary expectations and passthrough of elevated input prices. These might necessitate an upward revision in the inflation forecast at the upcoming rate review."

She also said the policy stance points to a long and gradual road towards policy normalisation. Guidance reinforced that the priority is to secure growth impulses and preserve policy room to meet this objective, diverging from the global policy shifts, particularly that of the US Fed.