HDFC bank chief economist Abheek Barua said the Reserve Bank is likely to leave policy rates unchanged in its fourth bimonthly monetary policy review, given the rapidly increasing risks to growth from external sources and the calming developments on the inflation front.
The RBI’s MPC rate setting panel started its three-day deliberations on Wednesday.
The central bank will announce the fourth bimonthly monetary policy review on Friday as inflation remains above target for two consecutive months.
Since lowering the repo rate by 40 basis points to 4 percent and the reverse repo rate to 3.35 percent on May 22, 2020 amid the first wave of the pandemic, the central bank has left key rates unchanged in the last eight reviews.
In a statement, Barua said the RBI is expected to maintain its accommodative stance without raising the reverse repo rate, the current policy rate.
However, he sees that RBI will reduce the volume of bond buybacks under the GSAP program in the third quarter, with the provision to revise it upwards if necessary.
Barua cited a number of reasons for his status quo call, including rising global risks, particularly from China, the Fed tightening, and fears that the US debt ceiling will not be raised.
This would have supply side effects for industrial intermediates and fuels, as well as demand-side manifestations, as global growth is likely to slow, he warned.
More worryingly, US bond yields have already risen sharply, which is affecting domestic yields.
Barua believes that there could be a capital outflow affecting domestic liquidity, which is now in excess, as the US economy picks up.
On the growth front, too, the domestic output gap remains high and capacity utilization in most industries is only below 75 percent. Household and SME balance sheets are still compromised and best repaired under low interest / high liquidity, he noted.
Therefore, risk-balancing requires withholding action and continuing the accommodative attitude, Barua added.
He also believes the RBI will keep its GDP forecast at 9.5 percent and revise its inflation forecast of 5.3 percent for the year from 5.9 percent for Q2 and Q3 due to falling food prices.
He expects average inflation of 5.1 percent for the second quarter and 4.8 percent for the third quarter and 5.35 percent for the full year through March.
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