MPC Repo Rate to Hike or Unchanged- Feb 2022: RBI Monetary Policy

Over the last few weeks, the worldwide monetary policy tide has shifted drastically, with major DM central banks rendering obvious intentions (and actions). On the local front, the economy is improving, and the Omicron variant’s influence is minimal. Long-end rates have risen due to the Union Budget’s substantial fiscal borrowing plan. Despite the RBI’s desire to be careful and slow in its policy normalization, some pandemic-related actions will have to be reversed. We anticipate the RBI should begin normalizing the reverse repo rate around February by increasing it by 20 basis points.

With crude plus commodity prices being high, the RBI MPC is expected to reiterate its concerns about inflation. The panel is doubtful to reverse its mind or suggest a rate hike there shortly. A narrower gap between the repo rate and the reverse repo rate could also serve to reduce volatility. This will signify the beginning of the normalization of pandemic measures, which is crucial.

Inflation is expected to stay high in the next several months, hovering at 5.5-6 percent, then falling to around 4.5-5 percent for the rest of CY2022. Nevertheless, the possibility of continued high crude oil prices and move to rising pump prices should keep gasoline price increases alive. One of the key concerns would be core inflation, which is anticipated to stay high for the majority of the year, within an area of 5.5-6 percent.

Growth impulses have slowed during the holiday season, although the 3rd Covid wave has had a smaller impact. With the number of illnesses declining and immunizations proceeding quickly, development is expected to continue.

Ultimately, the Reserve Bank of India (RBI) must revert to a “normal” monetary plus liquidity policy. It will give the RBI the freedom to adjust as and when needed and a better understanding of the yield curve. Even if the RBI MPC retains its accommodative posture and holds the repo rate steady in February, the RBI must raise the reverse repo rate by 20 basis points. It will raise the front-end of the curve’s floor and begin the normalization process without having a large negative effect on the economy.