Analysts say the Reserve Bank of India (RBI) may hike interest rates in the first half of next year and start rolling back its accommodative policies that have led to easy liquidity conditions. The central bank has been keeping the status quo on policy and continuing with the accommodative stance to help revive gross domestic product (GDP) growth.
The view comes as inflation cooled down to 5.6 per cent for July after two months of crossing 6 per cent, the upper end of the RBI's tolerance band.Analysts say the Reserve Bank of India (RBI) may hike interest rates in the first half of next year and start rolling back its accommodative policies that have led to easy liquidity conditions. The central bank has been keeping the status quo on policy and continuing with the accommodative stance to help revive gross domestic product (GDP) growth.#
Finance minister Nirmala Sitharaman recently said the current conditions do not warrant withdrawal of the accommodative measures.
"The RBI has been tolerant of inflation and has stayed accommodative to support growth given the deep hit suffered by the economy. But it appears to be reaching the end of tether as inflation remains elevated," rating agency Crisil said.
"If this pressure (on inflation) continues and systemically important central banks, especially the (US) Fed, begin normalising, the RBI will start to roll back accommodation. We expect the RBI to make a more definitive statement by this fiscal end, and raise rates by 0.25 per cent," it was quoted as saying by a news agency.
Another rating agency Acuite said it expects policy normalisation to begin in a gradual fashion with comfort on vaccination, clarity on fiscal stance and global rates setting and called the increase in the quantum of variable reverse repo auctions as the first small step towards the same objective.
Next, the central bank can look at increasing the reverse repo rate by 0.40 per cent to narrow the difference between repo and reverse repo rate to 0.25 per cent by February 2022, it said, adding that the repo will be unchanged at 4 per cent.
In parallel, the vaccination drive is expected to lead to herd immunity and thereafter, the RBI will follow up with a 0.25 per cent rate hike in April 2022, Acuite said.
Analysts at Japanese brokerage Nomura said last week's review had signs of RBI policy pivoting towards normalisation, pointing out to one of the members of the monetary policy committee also dissented against the ‘accommodative stance’ and the increase in FY22 headline inflation target to 5.7 per cent.
"The August policy meeting already bore initial signs of a policy pivot via calibrated liquidity normalisation. We believe this will be followed by the phasing out of durable injectors of liquidity, a 0.40 per cent reverse repo rate hike (in December quarter) and 0.75 per cent of repo/reverse repo rate hikes in 2022," it added.
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