RBI may signal policy normalisation on October 8, say StanChart

RBI may signal policy normalisation on October 8, say StanChart

The Reserve Bank of India is likely to signal the start of an unwinding of its accommodative monetary policy, introduced to cushion the economic impact of the pandemic, at a meeting next week, economists at Standard Chartered Bank wrote in a research note on Friday.

The consensus view is that the RBI will leave interest rates unchanged at its Oct. 8 MPC meeting and only start to unwind its accommodative monetary policy by reducing the gap between the repo and reverse repo rates early next year.
Some economists, including those at StanChart, however have brought forward their policy normalisation expectations amid concerns of rising domestic inflation from high oil and global commodity prices and a sharp increase in the pace of vaccination.

“We now expect India’s Monetary Policy Committee (MPC) to hike the reverse repo rate by 40 basis points to 3.75% at the December 2021 and February 2022 policy meetings; we had earlier expected the hikes in February and April 2022,” the Standard Chartered economists said.

They expect the MPC to raise the key repo rate only in August 2022 but said the risk of an earlier hike has increased. They also acknowledged the risk of a nominal increase in the reverse repo rate on Oct. 8, on account of the higher cut-offs at recent variable rate reverse repo auctions.

“Unlike VRRR cut-offs/sizes and tenor, a reverse repo rate hike is a firmer signal of policy normalisation, in our view,” the economists said.