Chennai, April 4 (IANS) The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is expected to change its stance after taking a guard against inflation by delivering a 25 basis points (bps) hike in the repo rate on April 6, said economists.
“There will be a 25 bps increase (in repo rate) and change in stance — to neutral. The decision won’t be unanimous as last time. There will be a pause after the hike,” Madan Sabnavis, Chief Economist, Bank of Baroda told IANS.
The MPC is likely to change policy stance to ‘neutral’, with a non-committal forward guidance, said Madhavi Arora, Lead Economist, Emkay Global Financial Services.
Arora said, the neutral stance will give the MPC flexibility to be non-committal on forward guidance, yet subtly give direction on a ‘pause’.
“In our view, a ‘hawkish pause’ is less purposeful in sending clearer forward signaling, while a ‘hawkish hike’ makes even less sense from the policy perspective, amid limited macro levers and expected growth slowdown ahead,” Arora said.
“We reckon a part of the policy compulsion was emanating from the sharp & consistent (upward) repricing of global rates and the consequent fear of INR (Indian Rupee) instability through capital account and the absent high risk-premia offered by India. Both fears are likely to diminish now, implying that the RBI can choose to pause ahead and keep policy flexibility amid a still-fluid global situation,” Arora added.
According to Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC, unseasonal rain, early forecasts of El-Nino, rising prices of milk and sugarcane and others are negative for the inflation outlook.
On the other hand, the banking crisis in the US and Europe and the slowing growth outlook might also be considered by some members. Another 25 bps rate hike with a stance change to neutral looks like the most likely outcome, Pathak said.
Continuing further he said, the bond market will focus more on the RBI’s future outlook. A 25 bps rate hike is broadly in price while retention or change of stance will move the bond market. Retention of the current policy stance as ‘withdrawal of accommodation’ will be perceived as an indication of further rate hikes and thus will be negative for the bond market.
The market will also look for the RBI’s position on liquidity conditions. The banking system liquidity deficit is likely to increase during the April-June period. In absence of liquidity support from the RBI, the short-term rate can move higher meaningfully, Pathak said.
–IANS
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