Monetary Policy: GDP growth projections may be left unchanged amid Covid-19

The recent rise in Covid-19 cases in India is a stark reminder of the uncertain times we live in. It also underlines the message that central banks have been trying to convey to the markets, i.e. policy needs to be shaped by actual outcomes rather than forecasts.
 
To quote Fed chair Powell from his mid-March speech “The fundamental change in, in our framework is that we, we’re not going to act pre-emptively based on forecasts for the most part. And we’re going to wait to see actual data. And I think it will take people time to, to adjust to that – and to adjust to that new practice. And the only way we can really build the credibility of that is by doing it”.

 
In our interpretation, the monitoring of actual outcomes in this cycle would stretch beyond the usual growth-inflation dynamics to include the effectiveness of vaccines and the proportion of population that is vaccinated. The latter would provide a better assessment of the sustainability of the growth recovery, which is a prerequisite, in our view, for monetary policy normalisation.
 

In this context, the Monetary Policy Committee (MPC) is likely to reiterate similar themes this time. It is likely to keep policy rates on hold, maintain its accommodative stance going into FY22, and sound dovish amid rising Covid-19 cases. We do not expect any forecasts changes. Headline CPI inflation is expected to average higher than 5 per cent in H1-FY22 (period ending September 2021), higher than MPC’s comfort threshold of 4 per cent but in line with its projections provided in the February MPC meeting.

 
The MPC’s FY22 GDP growth projections are likely to be left unchanged at 10.5 per cent as rising Covid-19 cases and stricter movement restrictions pat down exuberance on the growth recovery; consensus expects FY22 GDP growth at 11 per cent YoY. However, we expect the MPC to sound cautious on the growth outlook as the Covid-19 situation has worsened relative to a couple of weeks back. India’s vaccination pace has been maintained at an average 2mn doses per day but needs to be accelerated further to 3 million doses if the target of vaccinating 30 per cent of the adult population is to be achieved by mid-FY22.

 
With no major action expected in the upcoming MPC, markets will likely closely watch for any change in forward guidance that might indicate the MPC’s intent to remain accommodative for longer. Since the October policy meeting, the MPC has highlighted that it will maintain its accommodative stance at least in FY21 and going into FY22. An indication that the MPC intends to stay accommodative for say the full-year FY22 could provide comfort to markets. But given the uncertainties, it is most likely to leave it as “going into FY22”.
 
If policy is more dovish than our expectations, markets may draw comfort. Since December, the rates market has been pricing in policy normalisation over the next 12 months as the Covid-19 curve had flattened until February; such expectations have now been marginally reduced with the steep increase in Covid-19 cases. We think such expectations may be pared down further if cases rise further and stricter social distancing norms are put in place; more clarity is likely to emerge over the next few weeks. We believe policy normalisation is unlikely to play out before Q3-FY22; by then, policy makers should have a clearer picture on vaccine effectiveness for a reasonable percentage of the adult population.

 
The author is Head, South Asia, Economics Research, Standard Chartered Bank