MUMBAI: Leading economists and analysts believe that the political stance as well as the tone of the central bank “clearly signals a normalization of political stance”, even though the governor continues to prioritize growth relative to inflation.
Calling the RBI’s political stance “between Scylla and Charybdis,” State Bank of India (SBI) chief economist Soumya Kanti Ghosh said that while the decision on interest rates was unanimous, “the vote on the accommodating position had a dissent.”
He also has problems with the inflation forecasts and the apparent attempt to view them as “transient,†as Western central banks are currently doing.
Care Ratings chief economist Madan Sabnavis also believed the policy clearly signaled normalization.
Although the RBI kept the policy rate at an all-time high of 4 percent for the seventh time and maintained an accommodative stance, the Monetary Policy Committee (MPC) vote on maintaining the policy stance had a dissenting voice, while all voted for the status quo of rates, Sabanvis pointed out.
“Even though there is no mention of a normalization of political support, as the vote on the stance of monetary policy was not unanimous, this indicates that the stance of accommodative policy may not prevail for too long, â€he said.
The political stance makes it clear that the RBI’s decision to recalibrate excess liquidity has already started, said Tanvee Gupta Jain, economist at UBS Securities India.
Jain, however, said the actual tightening would not begin until the June 2022 quarter to ensure economic recovery, even if inflation exceeds the 4% target in the interim.
While policy normalization is expected to begin at the end of FY22, the movement towards recalibrating excess liquidity, as we anticipated, has already started. But a rate hike is likely in the second half of fiscal 23, she added.
“The inflation projection, which was substantially revised upwards to 5.7% for fiscal year 22 from 5.1% in June, is more worrying.
“Even though the RBI has made it clear that the upward trajectory of inflation is transient, we believe that managing inflation could be a serious problem when the pass-through from high fuel prices begins to occur and the inflationary shock is therefore unlikely to be transitory, even by definition. “Gosh said.
He pointed out that most of the big central banks like the Fed and the ECB have used the word “transitionalâ€.
“But we have to differentiate between transitory inflation in developed economies and at home. While developed economies have not seen inflation above 2% even after relentless QE, here in India it has come close to the 6% in the last year and almost all inflation, headline, core, rural and urban numbers converge at 6% or more, implying that the inflation numbers may not be transitory â€Said Ghosh.
Crisil’s Dharmakirti Joshi also expressed concerns about inflation as prices rise despite weak demand and companies have already started to pass rising input costs on to consumers in order to protect their margins.
The MPC will have to keep its eyes peeled for prices over the next few quarters, he said.
Sunil Kumar Sinha of India Ratings said higher inflation projections indicate inflationary pressures are not expected to ease anytime soon despite the resumption of the southwest monsoon and resumption of kharif planting.
It also indicates that an anchoring of inflation expectations at around 4%, which was the case before the pandemic, is not on the table at the moment.
Aditi Nayar, chief economist at Icra Ratings, said steps in absorbing liquidity, such as the rare and more variable reverse repo auctions, will lead to hardening yields.
Until the new 10-year benchmark is systematically included in liquidity trading, which may be unlikely until its issuance reaches a reasonable volume, we expect its performance to continue. to increase to 6.35%, she added.
Calling the RBI’s political stance “between Scylla and Charybdis,” State Bank of India (SBI) chief economist Soumya Kanti Ghosh said that while the decision on interest rates was unanimous, “the vote on the accommodating position had a dissent.”
He also has problems with the inflation forecasts and the apparent attempt to view them as “transient,†as Western central banks are currently doing.
Care Ratings chief economist Madan Sabnavis also believed the policy clearly signaled normalization.
Although the RBI kept the policy rate at an all-time high of 4 percent for the seventh time and maintained an accommodative stance, the Monetary Policy Committee (MPC) vote on maintaining the policy stance had a dissenting voice, while all voted for the status quo of rates, Sabanvis pointed out.
“Even though there is no mention of a normalization of political support, as the vote on the stance of monetary policy was not unanimous, this indicates that the stance of accommodative policy may not prevail for too long, â€he said.
The political stance makes it clear that the RBI’s decision to recalibrate excess liquidity has already started, said Tanvee Gupta Jain, economist at UBS Securities India.
Jain, however, said the actual tightening would not begin until the June 2022 quarter to ensure economic recovery, even if inflation exceeds the 4% target in the interim.
While policy normalization is expected to begin at the end of FY22, the movement towards recalibrating excess liquidity, as we anticipated, has already started. But a rate hike is likely in the second half of fiscal 23, she added.
“The inflation projection, which was substantially revised upwards to 5.7% for fiscal year 22 from 5.1% in June, is more worrying.
“Even though the RBI has made it clear that the upward trajectory of inflation is transient, we believe that managing inflation could be a serious problem when the pass-through from high fuel prices begins to occur and the inflationary shock is therefore unlikely to be transitory, even by definition. “Gosh said.
He pointed out that most of the big central banks like the Fed and the ECB have used the word “transitionalâ€.
“But we have to differentiate between transitory inflation in developed economies and at home. While developed economies have not seen inflation above 2% even after relentless QE, here in India it has come close to the 6% in the last year and almost all inflation, headline, core, rural and urban numbers converge at 6% or more, implying that the inflation numbers may not be transitory â€Said Ghosh.
Crisil’s Dharmakirti Joshi also expressed concerns about inflation as prices rise despite weak demand and companies have already started to pass rising input costs on to consumers in order to protect their margins.
The MPC will have to keep its eyes peeled for prices over the next few quarters, he said.
Sunil Kumar Sinha of India Ratings said higher inflation projections indicate inflationary pressures are not expected to ease anytime soon despite the resumption of the southwest monsoon and resumption of kharif planting.
It also indicates that an anchoring of inflation expectations at around 4%, which was the case before the pandemic, is not on the table at the moment.
Aditi Nayar, chief economist at Icra Ratings, said steps in absorbing liquidity, such as the rare and more variable reverse repo auctions, will lead to hardening yields.
Until the new 10-year benchmark is systematically included in liquidity trading, which may be unlikely until its issuance reaches a reasonable volume, we expect its performance to continue. to increase to 6.35%, she added.
