MPC meeting: Analysts bet on rate retention, revision of forecasts

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), which begins its three-day meeting on Wednesday, is expected to keep key policy rates unchanged in the first bi-monthly review of monetary policy this fiscal year.

Analysts said the MPC is likely to revise growth and inflation forecasts following rising crude oil and commodity prices. At the previous policy meeting on February 10, the RBI kept the repo rate – the rate at which it lends to banks – unchanged for the tenth consecutive time at 4%. The big question is whether or not the RBI will change its accommodative policy. The US Federal Reserve raised interest rates last month to deal with high inflation.

“We expect the RBI MPC to hold all rates on April 8 while maintaining its dovish stance. We then see the MPC turn neutral in June alongside a 40bps increase in the reverse repo rate, normalizing the policy corridor. Going forward, as the supportive base effects fade and CPI inflation picks up further, we see the RBI MPC making its first repo rate hike of 25 basis points in August,” said one. Bank of America Securities report.

The RBI projected a real (inflation-adjusted) gross domestic product (GDP) growth projection of 7.8% for FY23 in the previous policy. Retail price inflation was 6.07% in February.

“We believe that the RBI can maintain the status quo on rate actions. However, it can try to come up with a solution to generate demand for the higher than expected borrowing planned for FY23,” said said Prashant Pimple, MD & CIO-debt, JM Financial Asset Management.”The RBI would most likely revise GDP estimates down given the current turmoil and raise inflation forecasts,” he said.

With the ongoing Russian-Ukrainian war, commodity prices remain high. Global markets are analyzing the impact of this on global inflation and the growth trajectory. “Rising Covid-19 cases in China have posed another downside risk to the economic recovery. On the domestic front, the Rs 6.4 per liter rise in retail fuel prices this month has increased the burden of inflation on consumers. We expect RBI to take note of this and consider changing its dovish stance at the next meeting,” a Bank of Baroda report said.

Analysts also expect the RBI to announce measures to ensure non-disruptive execution of the government’s borrowing programme.