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MPC may not raise repo rate yet, feel experts

The upcoming RBI policy meeting on December 8 has sparked unusual interest in light of the looming threat of the newly discovered Omicron variant and surging inflation. Despite the perceived strengthening of the domestic economy, most experts believe the central bank will maintain key interest rates unchanged, owing to global market uncertainties.

YS Chakravarti, MD, and CEO, Shriram City, expects the RBI to maintain the status quo in the monetary policy, with an increased likelihood of the reverse repo being raised. “With the strengthening of the economy, we are also seeing green shoots of recovery in the SME segment, and we expect loan demand to pick up in 2022. In order to support economic recovery, the RBI and the government have been pushing for credit growth, which has been aided by lower interest rates on home and vehicle loans, and we believe this push will continue,” he said. 

Shanti Ekambaram, Group President, Consumer Banking, Kotak Mahindra Bank, believes the MPC will leave key interest rates unchanged. “With the economy on an upswing, led by a surge in consumer demand and ample liquidity, it was expected that the MPC would opt for a gradual withdrawal of excess liquidity and a change in its accommodative stance in the December policy. However, because of the looming threat of Omicron and the uncertainty it has created, the committee is now likely to keep key rates unchanged. A move in the reverse repo rate, which was widely anticipated in December, will now be postponed until the following calendar year,” she said.

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, stated that given the extended period of higher inflation, monetary policy normalization will continue in the major global economies, but the pace will vary depending on the respective central banks’ assessments of the residual pandemic risks. India is also expected to continue its gradual approach to normalization, and a phase-wise increase in the reverse repo rate can be envisaged in the current fiscal. 

According to Sandeep Bagla, CEO, TRUST Mutual Fund, the policy meeting will face tough choices — whether to maintain the status quo or to signal the start of the withdrawal of the extraordinarily easy monetary policy. It could be a non-event, with no change in policy or interest rates. The Omicron variant has posed a new threat to global growth, and India’s output gap appears to be wide open, justifying easy monetary policy. A hike in reverse repo from 3.35% to 3.6% cannot be ruled out. It boils down to making an economic choice. 

Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company, said, “While we can infer from past experience that each successive Covid variant has had an incrementally less severe impact on economic activity, there are no guarantees with Covid. The world’s central banks are abandoning their belief in the cyclical nature of inflation. In contrast, the Indian CPI is expected to remain within the MPC target band of 4–6% in the near term. This, in turn, should provide the MPC with time to assess the medium-term implications of Omicron by maintaining an accommodative pause in policy rates in December. We expect the RBI to continue normalizing high banking system liquidity by adjusting the quantum and tenor of existing VRRR operations.”

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