The domestic front and the economy continue to recover, impact from the Omicron variant is muted.
The Union Budget targeted a large fiscal borrowing that has shifted long-end yields higher. Globally and the monetary policy tide has turned sharply over the last few weeks with larger DM central banks making their intent clearer.
Even as the RBI may want to be cautious and gradual in its policy normalization also reversing some of the pandemic-related measures will need to start.
Believe that the RBI can start normalizing the reverse repo rate by raising the February policy. But as in the earlier meetings, it will likely indicate its comfort in liquidity normalization which lies in the RBI’s purview.
The repo rate and reverse repo rate help in reducing the volatility.it will also explicitly signal the start to normalization of pandemic measures. RBI MPC is to continue highlighting concerns on inflation.
The committee is to change unlikely its stance or signal an immediate hike in the repo rate. Inflation is remains elevated between 5.5-6% over the next few months and drifts lower closer to 4.5-5% through most of the CY2022.
Risks from global commodities into producer prices, pass-through to retail prices will weigh on inflation for most of the year.
The MPC will remain concerned about inflation and especially as the growth momentum continues to improve, especially in the contact-based services sectors.
One of the main worries will be core inflation continuing to remain elevated in the range of 5.5-6% for most of the year. Cases coming down significantly, vaccinations progressing at a rapid pace, and growth momentum is likely to remain positive.
RBI is likely too cautious on the growth trajectory. The unorganized economy has been affected much more adversely than the rest of the economy, will continue to require some support.
The Growth impulses softened after the festive season but have been relatively less affected due to the third Covid wave.
Government borrowing risks being larger than it has been over the next some years demand and supply of market borrowings. Then as the RBI focuses on normalization it will be difficult to keep managing yields.
RBI may have some opportunity consequent intervention to keep a check on any sharp INR depreciation. So it could open up some space for supporting yields.
Follow and connect with us on Facebook, LinkedIn & Twitter
