MPC meet preview: Will RBI follow the Fed’s hawkish pivot to tackle inflation?

Investors eagerly await the Reserve Bank of India (RBI) monetary policy decision due on April 8, expecting the central bank to change its stance in view of surging inflation akin to the hawkish policy measures taken by the U.S. Federal Reserve. However, the RBI seems far from following suit despite retail inflation breaching the upper tolerance limit of 6% as set by the apex bank.

Recently, the Federal Reserve Bank in the U.S. announced a 0.25 basis points increase in the rate for the first time in three years and also cleared a roadmap for six more hikes to ease inflationary pressure on the economy. The Bank of England also followed in the footsteps, while the European Central Bank announced a faster tapering of asset purchase programmes in the backdrop of the economic fallout from Russia’s invasion of Ukraine.

Back home, most industry experts expect the RBI to maintain the status quo on interest rates in its forthcoming monetary policy review amidst economic uncertainties created by the ongoing conflict between Ukraine and Russia, the world's largest exporter of oil to global markets. Experts say that though the RBI may keep key rates unchanged, it may revise up its Consumer Price Index-based inflation estimates, whereas the growth projections for 2022-23 would be downgraded.

The RBI governor Shaktikanta Das-led monetary policy committee (MPC) will begin its first meeting of the financial year 2022-23 from April 6 to 8. The policy decision will be unveiled on April 8.

“Central Banks globally have embarked upon raising interest rates to curb inflationary pressure. However, India so far has maintained a more accommodative policy. Retail inflation in India in February 2022 rose to an 8-month high of 6.07%, which is outside the RBIs target range of 4-6%. In the last MPC meeting, RBI attributed high inflation largely due to supply-side pressures and hence they could be keen to maintain a more accommodative policy in this time MPC,” says Shivam Bajaj, Founder & CEO at Avener Capital.

“Tightening of monetary policy can assist in curbing demand but not in augmenting supply. There is likely to be renewed optimism in regard to inflation on the back of the U.S. announcing a massive release in the country’s strategic oil reserves and Russia offering crude oil to India at a big discount," Bajaj added.

The central bank is also expected to revise downward the GDP estimates in the wake of the Russia-Ukraine crisis and raise the inflation forecast as it stayed above the RBI’s 6% upper limit in the last two months. The CPI-based retail inflation rate stood at 6.07% in February and 6.01% in January.

“We would expect the MPC to review the earlier forecasts of both growth and inflation for FY23. Growth is likely to be revised downwards while inflation would be probably at least 100 bps higher given the evolving conditions. Based on the commentary provided last time there would be a status quo position maintained on both the repo and reverse repo rates,” says Madan Sabnavis, Chief Economist, Bank of Baroda.

However, with inflation breaching the RBI’s threshold limit, the central bank may change its policy stance from accommodative to neutral. “The change in policy stance would signal to the market that there would be possible repo rate hikes in the coming months if inflation remains intransigent at the present level. There would also be some indication given on the currency in general terms of support like the swap operations which will assuage the market,” Sabnavis added.

Experts at JM Financial Asset Management also projected no change in policy rates in the upcoming policy meeting, but expect revision in GDP estimates and inflation forecast.

"We believe that RBI in its current MPC may maintain status quo as far as rate actions are concerned. However, it may try to give some solutions for generating demand for the higher than expected borrowing scheduled for FY23. RBI would most probably revise the GDP estimates lower on the current disruptions and raise Inflation forecast at the upcoming Monetary Policy,” says Prashant Pimple, Managing Director & Chief Investment Officer – Debt, JM Financial Asset Management.

“Market will closely monitor the upcoming policy for bond supportive measures such as open market operation (OMO) twist or extension of held-to-maturity (HTM) dispensation further beyond March 2023. On the liquidity front, the RBI is expected to continue to absorb liquidity via variable rate reverse repo (VRRR) auctions," Pimple added.

In the last policy meeting in February, the MPC had kept key lending rates unchanged at record low levels for the 10th straight meeting to support the economy's recovery from the Covid-19 pandemic. The central bank also retained an inflation forecast of 5.3% for FY22 and 4.5% in FY23. The central bank had projected FY23 GDP growth at 7.8%, with Q1 FY23 at 17.2%; Q2 at 7.0%; Q3 at 4.3%; and Q4 at 4.5%.