“(We se) growth-inflation trade-off” said Saugata Bhattacharya, chief economist at Axis Bank. “There will be focus on ( liquidity) normalisation” With inflation achieved and good progress on its way, a late 2021 taper may be on the way later , said an Axis report.
” We will have to look for signals in its communication” Bhattacharya said. ” The RBI and the MPC central bank will look at liquidity flows on which it has control over”
” The increase in liquidity for the year has almost peaked – going by our own estimates” he said. Autonomous liquidity flows through FDI and portfolio flows, besides through overseas borrowings has pushed up autonomous liquidity flows adding to central bank’s liquidity management challenges. Global commodity prices continue to remain high and crude prices still rising. System liquidity at around Rs 8.5 lakh crore is also putting pressure on prices.
” So, it won’t be surprising if the RBI does something to suck out excess liquidity in its bid to contain inflationary pressures, as there are more upside risks to inflation now than in recent months, given the runaway commodity prices” Bhattacharya said. Headline CPI expected to average around 5.2% in FY’22 according to Axis Bank.
The Monetary Policy Committee has not changed the key policy rates since May 22, 2020, when the rates were lowed to a historic low of 4 per cent to revive demand and economic activity. Going ahead, the fiscal policy is expected to play a greater role in further growth in the economy. Markets are also looking at signals from the central bank in the form of a hike in reverse repo rate.
