RBI may return to symmetric policy corridor by March’22: Report

The Reserve Bank may return to a symmetric policy corridor by as early as March’22 by hiking reverse rate in two steps as inflation pressures rise. Assuming no further threat from new infections, the MPC may turn neutral in its stance in April’22 and raise repo rate in June, according to a report by Bank of America( BofA) Securities.

” We now see the RBI hiking the reverse repo rate in 2 steps, a 20bp hike in Feb’22 and return to a symmetric policy corridor by Mar’22 with a potential hike in an out of turn policy” said Astha Gudwani, India economist at BofA Securities. ” Assuming that no serious third wave hits India in early 2022, we expect the RBI MPC to turn neutral in April and hike policy repo rate in June’22.

The Securities firm has based its forecast on its expectation that consumer price indexed (CPI) inflation will rise to an average 5.6% year-on-year (y-o-y) in FY’23 as demand recovers and global commodity prices stay elevated. Moreover, sticky core CPI inflation is likely to exert upward pressure on headline, even as food inflation stays largely contained. As demand recovers, the spillover from raw material prices to output prices, which was cushioned by the slack in the economy is expected to rise.

Even as the recent monetary policy statement expect government’s fiscal policy measures to address inflation concerns, BofA Securities says that the recent cut in oil taxes offers some comfort to inflation trajectory in the coming months, but some upward resetting of menu costs amidst rising raw material prices and improving domestic demand cannot be ruled out. Further it says that while CPI inflation is still expected to rise only modestly, the MPC is likely to refocus on the 4% target, rather than the 2-6% range that they referred to – as a flexible inflation targeting central bank in support of growth during the last 20 months.

Recovery is gaining steam and it sees real GDP growing at 8.2% y-o-y in FY’23 and 9.3% in FY22 due to base effects, sequentially the growth momentum is estimated to improve further. Contact intensive services sector, which is still reeling under the scar of mobility restrictions, is expected to support growth.

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