An ET poll of 24 banks, funds and financial institutions showed that the monetary policy committee (MPC) at the Reserve Bank of India (RBI) would also evaluate inflation risks arising out of the global energy crisis and rising motor fuel prices, something that could potentially dent growth and upset India’s balance of payments.
“The MPC is likely to remain wary of inflation risks, given the recent increase in energy prices,” said Anubhuti Sahay, senior economist at Standard Chartered Bank India. “We expect the MPC to stay accommodative, with a focus on sustained growth recovery, in the face of risks to global growth on energy crisis and risks of another round of increase in viral infections through a busy festival season.”
The poll indicates the RBI’s ‘accommodative’ policy stance will remain unchanged.
Global Fuel Crisis
In the US, benchmark bond yields have lately hardened in reflection of higher global crude oil prices, which are in the vicinity of $80 a barrel and could touch $90 through the onset of winter in the northern hemisphere.
On the other side of the Atlantic, UK benchmark bonds breached the 1% yield threshold for the first time since March 2020, reflecting concerns over asset pricing, as a motor fuel crisis grinds parts of Britain to a screeching halt.
The central bank estimates consumer price inflation at 5.7% for FY22 and real GDP growth at 9.5%. The inflation print in August was at 5.3%.
India’s economy expanded 20.1% in the June quarter, versus 24.4% growth contraction in the corresponding quarter last year. Benchmark Indian stock indices that rose to fresh highs have come off since, although they are still within 5% of their record showing.
Last week, global crude oil prices crossed $80 a barrel for the first time in three years, amid signs of widespread fuel shortfall. In the past month, Brent crude rose more than 8.5%.
Any rise in oil prices is inflationary on domestic consumer prices as it raises import bills for India, the world’s third largest consumer.
Meanwhile, in a seven-day variable repo auction last Tuesday, the RBI accepted a cut-off yield almost on a par with the repo rate, at 4%. This is seen as the first sign of rolling back emergency liquidity measures introduced to contain the economic fallout of the pandemic.
Higher Reverse Repo Rates
Five respondents, including Citigroup, India Ratings, JM Financial, AU Small Finance Bank and a large mutual fund, expect a 15-basis point rise in the reverse repo rate, that is at 3.35%. This is the rate at which banks park surplus cash with the RBI. A basis point is 0.01%.
