RBI Monetary Policy Review: Quick thoughts ahead of announcement by Nomura India

RBI Monetary Policy Review: Nomura highlights that expectations ahead of tomorrow’s RBI MPC meeting where many analysts expect policy rates to remain unchanged; however, there are rising market expectations (and media reports) that the RBI may be considering measures to address the surge in liquidity and realign money market rates with the policy corridor.

Economics:

Policy rate:

Nomura expects the RBI to leave both the repo and the reverse repo rates unchanged, in line with consensus, while maintaining its “accommodative stance”. Inflation has remained above the RBI’s upper tolerance level, reflecting supply-side factors such as unseasonal rains adding to broad-based food price pressures, with higher commodity prices and tax hikes also lifting core inflation. With GDP growth on a fast normalisation path after the Q2 plunge, the Monetary Policy Committee (MPC) is likely to vote unanimously to remain in a wait and watch mode. Reflecting the incoming data, Nomura expects the RBI to revise higher both its near-term growth and inflation projections.

Growth:

Nomura expects the RBI to revise up its FY21 (year ending March 2021) GDP growth projection to -8.5% yoy from -9.5%, with a positive growth projection in H2 FY21.

Inflation:

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Nomura expects an upward revision of more than 1 percentage point (pp) to 5.5- 6.9% in H2 FY21 (from 4.5- 5.4%) and a new H1 FY22 forecast of 4.2-4.8%.

Forward guidance:

Despite the more positive macro outlook, we expect the RBI to adopt a cautious tone, flagging uncertainty on the durability of demand following the festive season and downside risks due to infection cases in developed economies and parts of India. Additionally, high inflation is a concern, but much of the inflation build up remains due to supply-side factors. Thus, Nomura expects the MPC to reiterate its dovish guidance from October that it will see through the transitory inflation surge and maintain an “accommodative” stance into the next financial year.

While the RBI may introduce any of these or other measures to absorb transitory liquidity from the system, we do not think this would reflect a change in its accommodative stance or preference for liquidity to remain flush. Indeed, with government bond supply elevated into year end and likely to remain elevated in FY22, Nomura believes the RBI will likely continue to add to durable liquidity via OMO purchases and continue conducting operation twist.