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India's central bank leaves rates on hold amid Omicron risks

·7-min read
FILE PHOTO: FILE PHOTO: Reserve Bank of India logo is seen at the gate of its office in New Delhi

(Reuters) - The Reserve Bank of India's monetary policy committee (MPC) kept its key lending rate steady at record lows on Wednesday, as expected, with policymakers looking to gauge the impact of the Omicron coronavirus variant on the economic recovery.

The committee held the lending rate, or the repo rate, at 4%. The reverse repo rate, or the key borrowing rate, was also maintained at 3.35%.

All 50 economists polled by Reuters had expected no change in the repo rate and did not expect a change before the second half of 2022.

COMMENTARY

RADHIKA RAO, ECONOMIST, DBS BANK, SINGAPORE

"Policy guidance reinforced that the MPC's priority is to secure growth impulses and preserve policy room to meet this objective, diverging from the global policy shifts, particularly the U.S. Fed."

"Even as inflation risks were highlighted on imported pressures and volatility in food, 'flexibility' in the price stability mandate will see the recovery path dictate the policy direction."

"The reverse repo rate was left unchanged, but the liquidity absorption framework will be rebalanced, away from fixed and into variable auctions, with the 14-day as an anchor. Either way, existing liquidity has already been repriced higher courtesy the string of VRRR (variable rate reverse repo) auctions, which in turn has driven money market/short-term rates up."

"Persistence in the banking system liquidity at levels well in excess of pre-pandemic surplus will require further action into 2022."

GARIMA KAPOOR, ECONOMIST - INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI

"Notwithstanding improving economic outlook and emerging concerns on inflation, the MPC held rates steady and retained guidance amid Omicron-related uncertainty and to support broad-based and durable recovery. However, as expected, RBI continued to amble along the liquidity policy normalisation path by hiking VRRR quantum, thus laying the groundwork for a likely first reverse repo rate hike early next year."

"We expect MPC to hike reverse repo over Feb 2022 and April 2022 and are pencilling in the first repo rate hike in August 2022."

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

"The MPC has chosen to stay put on policy rate and kept growth as well as inflation forecasts unchanged to ensure that the recovery receives continued support in the face of persistent uncertainty from the pandemic."

"We believe that the MPC will need to take note of resilient domestic demand and high input inflation going forward and pave the way for normalisation of crisis-level monetary policy while still maintaining an accommodative stance i.e. negative real policy rates."

NIKHIL GUPTA, CHIEF ECONOMIST, MOTILAL OSWAL FINANCIAL SERVICES, MUMBAI

"Going forward, we fear that real GDP growth could be lower than the RBI projections, with inflation falling broadly in line. Along with the rising threat from the Omicron variant, there is a possibility that a hike in reverse repo could be postponed further to April 2022. However, if growth turns out to be better than our expectations and the Omicron threat doesn't materialize, a 15 bps hike in reverse repo rate in February 2022 cannot be ruled out."

UPASNA BHARDWAJ, SENIOR ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI

"The MPC expectedly maintained status quo on the policy rates and stance. The rhetoric too has remained focused on maintaining durable growth as long as inflation remains well in check."

"We continue to expect RBI to fine-tune the surplus liquidity to manage rates and consequently provide guidance on the operating target rate shifting closer to the repo rate. We retain our base case of reverse repo rate hike in February."

SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI

"The policy was as expected and cautious on the uncertainty due to the Omicron variant. Also, the RBI continued with the liquidity normalisation on expected lines without any explicit signal of liquidity withdrawal. The inflation estimates are also lower than what the markets are expecting."

"Broadly, the policy is more dovish than expected, possibly given the uncertainty from the new COVID variant. If the Omicron variant is benign, we expect a reverse repo hike of around 20 bps possible in the February policy and a tad more aggressive liquidity withdrawal."

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI

"It's a status quo policy in terms of rates, stance and projections. The RBI's plan to rebalance liquidity by increasing the variable reverse repo quantum will raise short-term rates in a gradual fashion without creating spikes in the long-term cost of borrowing. The policy appropriately reflects the concerns created by the emergence of Omicron and the associated uncertainty."

VIVEK KUMAR, ECONOMIST, QUANTECO RESEARCH, MUMBAI

"Despite improvement in growth momentum and emergence of some upside risk to inflation, the central bank resisted any direct form of interest rate normalisation while maintaining its emphasis on gradual calibration of liquidity to reinforce alignment of short-term money market rates towards the upper end of the policy rate corridor. The risk from Omicron seems to have thwarted the formal commencement of interest rate normalisation."

"While we continue to believe that the economy and financial markets are poised for a token beginning of formal interest rate normalisation, the RBI could remain in a wait-and-watch mode with any near-term action policy normalisation dependent upon the spread and virulence of Omicron along with its implications for vaccine efficacy and spillover on economic activity."

"As of now, we put on hold our call of a 20 bps hike in the reverse repo rate in February 2022 and await clarity on the pandemic situation."

SHASHANK MENDIRATTA, ECONOMIST, IBM, NEW DELHI

"The central bank stance continues to remain accommodative, with emphasis that recovery needs continued support to make it more broad-based."

"While the RBI broadly maintained its growth projections, inflation estimates were revised lower despite cost push pressures. As such, negative output gap is likely limiting the pass-through of rising input costs to output prices."

"In our assessment, growth will likely improve further in Q3FY22, should the risks of the third wave not materialize."

"This should allow the central bank to focus on managing inflation amid continued focus on withdrawing surplus liquidity, and eventually the first rate hike in April 2022."

ADITI NAYAR, CHIEF ECONOMIST, ICRA, GURGAON

"While a subtle shift has been brought in with the comment that price stability remains the cardinal principle of monetary policy, the overarching tone of today's statement and forward guidance is less hawkish than what we had anticipated."

"The comment on managing a durable, strong, as well as inclusive recovery, underscores concerns of a K-shaped trend underpinning the traction in economic growth."

"With the MPC remarking that the ongoing domestic recovery needs sustained policy support to make it more broad-based, we now foresee a slightly lower likelihood of our base case assessment that the stance will be changed to neutral in the February 2022 policy review."

SAKSHI GUPTA, SENIOR ECONOMIST, HDFC BANK, GURUGRAM

"The RBI policy was more dovish than our expectations and the central bank kept its stance, policy rate and corridor unchanged at its meeting today."

"The central bank erred on the side of caution, emphasizing that while growth has picked up, it is still not sustainable. The Omicron risk, as expected, found its place in the policy statement."

"The RBI's inflation forecast, unchanged for FY22 at 5.3%, seemed to play down the inflationary risks and viewed them as more transitory than permanent in nature."

"We expect the Feb policy to possibly be the turning point (at least in terms of reverse repo rate hike) for the policy if the Omicron virus risk is managed."

"On inflation, we expect prints to be higher than currently being expected and average at 5.6% in FY22."

(Reporting by Rama Venkat, Chandini Monnappa, Anuron Kumar Mitra, Vishwadha Chander, Shivani Singh and Nallur Sethuraman in Bengaluru; Editing by Devika Syamnath)

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