According to commentators, the Reserve Bank may have reached the limit of its tolerance for rising inflation and will most likely raise interest rates in the first half of 2022. They also stated that the central bank will begin to reverse its supportive policies, which have resulted in easy liquidity conditions.
Analysts’ predictions came after inflation fell to 5.6 percent in July, after two months of exceeding the RBI’s 6 percent tolerance limit. To help boost GDP growth, the central bank has maintained the status quo on policy and maintained an accommodative approach. On Thursday, Finance Minister Nirmala Sitharaman stated that the current circumstances do not allow the removal of the supportive 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 NSE -0.98 % said.
“If this pressure (on inflation) continues and systemically important central banks, especially the (US) Fed, begin normalizing, 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 percent,” it added.
Acute, a peer, expects policy normalization to begin gradually, with confidence in immunization, clarity on fiscal policy, and global rate setting and described the increase in the quantum of variable reverse repo auctions as a first little step toward that goal.
The central bank can then consider raising the reverse repo rate by 0.40 percent to reduce the spread between the repo and reverse repo rates to 0.25 percent by February 2022, it said, adding that the repo rate will remain at 4%.
In parallel, the vaccine campaign is projected to result in herd immunity, following which the RBI would raise interest rates by 0.25 percent in April 2022. Last week’s review, according to analysts at Japanese brokerage Nomura, showed signals of RBI policy normalization, with one member of the monetary policy committee dissented from the “accommodative stance” and the increase in FY22 headline inflation goal to 5.7 percent.
“The August policy meeting already bore initial signs of a policy pivot via calibrated liquidity normalization. We believe this will be followed by the phasing out of durable injectors of liquidity, a 0.40 percent reverse repo rate hike (in December quarter), and 0.75 percent of repo/reverse repo rate hikes in 2022,” it said.