RBI Preview: Forecasts from five major banks, moving towards normalisation

India’s Monetary Policy Committee (MPC) meeting has been scheduled by a day to February 8-10. Here are the expectations as forecast by the economists and researchers of five major banks regarding the upcoming central bank's decision. 

The Reserve Bank of India (RBI) is expected to hold its repo rate steady but several economists are expecting an increase in the reverse repo rate.

ING

“Though they are not expected to raise the policy repo rate (4.0% currently), there is an outside chance that they do. The latest Union Budget released was quite expansionary, and bond spreads widened out on the back of it. Throw in some toppy inflation numbers and a decent growth backdrop and it is clear that we are nearing a rate hike – if not this month, then soon. The RBI already raised the cash reserve ratio last year, and it could continue that process of unwinding emergency stimulus and liquidity measures by raising the reverse repo rate to narrow the corridor with the repo rate even if the policy repo rate is left unchanged.”

SocGen

“Despite the unmistakable global trend towards monetary policy normalisation, we believe the RBI is likely to swim in the opposite direction and keep the policy rate steady at 4.0% at its upcoming meeting while using every tool in the box to calm nerves and hold back surging yields.”

ANZ

“We do not expect any policy rate action (repo rate at 4.00%) apart from a 40bp hike in the reverse repo rate to 3.75%, reverting the repo-reverse repo corridor to its pre-pandemic width. Yet, the central bank may not be able to hold off for longer – we expect the first 25bp rate hike at the April meeting.”

TDS

“We expect the RBI to keep its policy repo rate on hold at 4.00% but hike its reverse repo rate by 40bp to 3.75% in order to narrow the corridor between both rates. While a reverse repo rate hike may on the margin be positive for INR, we think the impact will be limited and short-lived.”

Standard Chartered

“We expect the RBI to initiate policy normalisation via a 25bps hike to the reverse repo rate, while the repo rate is likely to be kept unchanged at 4%. We see complete normalisation of the policy corridor (the gap between the repo and reverse repo rate) by a total 40bps by April. We continue to expect the MPC to hike the repo rate by 75bps between August and December on elevated inflation concerns (flagged by global central banks recently) amid higher commodity prices and supply issues. We expect growth projections to be kept unchanged, while inflation forecasts may be raised marginally, though recent trends indicate inflation in line with the Q4-FY22 (ending March 2022) estimate of 5.7% (our estimate: 6%). We will closely watch for policy guidance and any further steps towards liquidity normalisation (via VRRRs), along with efforts to support the bond market (via Operation Twist/held to maturity limit hike).”