RBI raises inflation forecast as pressure builds for tapering stimulus

MUMBAI, Aug 6 (Reuters) – The Reserve Bank of India kept interest rates steady at record lows on Friday, but it raised its inflation forecast and said it would normalise liquidity conditions in a signal that policymakers could be edging closer to tapering stimulus.

As widely forecast, the RBI held the repo rate, its key lending rate, at 4% and kept the reverse repo rate, the borrowing rate, unchanged at 3.35%.

All 61 economists polled by Reuters late last month had said they see no change in the repo rate which has been steady at 4% since May last year. read more

“The need of the hour is not to drop our guard and to remain vigilant against any possibility of a third wave especially in the background of rising infections in certain parts of the country,” RBI Governor Shaktikanta Das said in a virtual address accompanying the MPC’s decision.

All members voted in favour of the decision to hold rates and a 5-1 majority supported retaining the accommodative monetary policy stance, Das said.

The RBI also announced that it will conduct four variable rate reserve repo (VRRR) auctions, one each fortnight, over August and September to restore normal liquidity operations.

The central bank has pumped in massive amounts of liquidity through various measures like open market operations, long-term repo operations among others, ensuring the banking system has an average surplus of around 6 trillion rupees ($80.87 billion).

“These enhanced VRRR auctions should not be misread as a reversal of the accommodative policy stance,” Das said.

The benchmark 10-year bond yield , however, rose 3 basis points to 6.24% following the announcement as traders saw the step as the start of RBI’s liquidity normalisation and eventually cash withdrawal phase.

“RBI policy is hawkish at the margin. While there is no real change in the policy, bond market participants will take the nuanced change in language seriously,” said Sandeep Bagla, CEO at investment management firm TRUST AMC.

At 0622 GMT, the NSE Nifty 50 index and the benchmark S&P BSE Sensex were each down around 0.1%. The rupee was marginally weaker at 74.18 per dollar.

The RBI also raised its projection for retail inflation for full year 2021/22 to 5.7% from 5.1% previously, increasing concerns over the need for a quick reversal of policy later if price pressures fail to abate.

“For the time being, it seems the RBI is using the entire band of 2%-6% as target range rather than the median of 4% to continue to remain accommodative,” said Kunal Kundu, India economist at Societe Generale.

“Inflation may have peaked but with the RBI raising FY22 inflation forecast … is clear indication of underlying price pressure that too needs to be addressed in order to prevent a potential stagflation situation going forward.”

RBI has slashed the repo rate by a total of 115 basis points (bps) since March 2020 to soften the blow from the health crisis and tough containment measures. This follows 135 bps worth of rate cuts since the beginning of 2019.

The consensus in the latest Reuters poll expects the RBI to deliver two 25-basis-point rate hikes in the next fiscal year, taking the repo rate to 4.50% by end-March 2023.

($1 = 74.1960 Indian rupees)

Disclaimer :- This story has not been edited by The Sen Times staff and is auto-generated from news agency feeds.
Source: Reuters