The Central bank is best served by maintaining the policy approach outlined in the October statement, even as it likely acknowledges some optimistic turn in growth indicators and sticky inflation, investment banker Barclays said on Wednesday ahead of the Monetary Policy Committee (MPC) policy review early next month.
“We expect the Reserve Bank of India’s (RBI) monetary policy committee to keep rates steady next week, even though we expect its inflation and growth forecasts to be revised higher,” Barclays said in its research report on emerging markets.
The actions announced by the Central bank in its October MPC meeting have achieved some success in keeping borrowing costs low across the public and private sector, as well as reducing risk – premia. The investment banker said that these policies will be needed for longer to enhance credit flows in the economy.
As such, with the economy remaining on the path of a gradual recovery and facing sticky supply side price pressures, we expect the RBI to stay on hold, maintain an accommodative stance, and continue to emphasise that a “durable improvement in growth” is needed before it would re-look at policy settings, the report said.
The RBI’s policy announcements in October were bold and effective in many aspects. The bank provided enhanced forward guidance — promising to keep an accommodative stance through next year — as well as moving further into providing additional liquidity support by saying it may buy state government bonds. Notably, the bank noted that upside inflation surprises were mostly supply driven, hence likely to be transient and warranting little monetary response.
“As such, we think nurturing growth will remain central to the monetary policy and the RBI is likely to repeat the guidance provided in the October policy review,” the report added.
A key focus of policymakers has been to ease financial conditions in the economy. With little room to make further direct rate cuts given above target inflation, the RBI has made a number of unconventional moves to reduce the cost of capital across the economy. Along with enhanced forward guidance that the accommodative monetary stance will remain, the Central bank has eased a slew of regulatory norms and stepped up its pace of government bond buying over the past few weeks. This has ushered in a concomitant decline in interest rates across the economy, as government financing costs remain capped and risk spreads narrow. However, rate easing has not yet fully percolated down to the retail borrower, where credit-off take remains weak, Barclays said.