RBI likely to pause rate this fiscal, take call on liquidity surplus

Economists and treasurers expect a rate pause in the monetary policy on December 4, and the Reserve Bank’s ‘accommodative’ stance to continue, even as there could be some hint of withdrawal of excess liquidity from the system.  

In a Business Standard poll of 12 economists and bond market participants, the unanimous view was that the six-member monetary policy committee (MPC) will vote to keep the repo rate unchanged at 4 per cent. 

And, this status quo is here to stay for a long time, they felt. This, despite the fact that retail inflation in October came at 7.61 per cent, way above the upper bound of the tolerance range of 2-6 per cent. Economists say inflation would average above 6 per cent this fiscal, and is unlikely to come down below 5 per cent before March. 

“After witnessing a sharp contraction in gross domestic product by 23.9 per cent in the first quarter, and a multi-speed normalisation of activity in the second quarter, the Indian economy has exhibited stronger-than-expected pick-up in momentum of recovery,” RBI Governor Shaktikanta Das said last week.

Subsequent data released showed the economy contracted 7.5 per cent in Q2. “Room to cut is squeezed out as inflation continues to be above the threshold mark, but there are some signs that the economic recovery is gradually taking hold,” said Indranil Pan, chief economist at IDFC First Bank. “Given the still large output gap, however, we do not expect any tightening." He expected the status quo to continue beyond FY21.

“Despite the better-than-expected Q2 GDP, overall growth momentum is still markedly weak and the output gap is huge. Thus, the RBI is set to maintain a heavily accommodative stance for a fairly long period,” said Siddhartha Sanyal, chief economist at Bandhan Bank.  

In this context, the focus could shift to the excess liquidity sloshing in the system. Buoyed by the Rs 6.73-trillion excess liquidity, money market rates have nosedived. 

“Some measures to drain out liquidity through market stabilisation scheme, or standing deposit facility could be on the cards," said B Prasanna, group executive and head of global markets at ICICI Bank. He expected policy stance to stay accommodative with forward outlook — indicative of a shift towards neutrality by April.

“Money market rates have crashed to irrational levels. Even rates on long tenor corporate bonds have eased significantly. Funds are easily available at competitive rates. Yet investment confidence is low," said Rupa Rege-Nitsure, group chief economist at L&T Finance Holdings. The RBI must come out with measures to absorb excess liquidity to reduce “irrational pricing of money market instruments and protect the interest of savers”, she said.

“The policy would be a non-event, but behind the veil of it, the RBI might want to address the issue of continued liquidity overhang. We must, however, appreciate that persistent headline inflation even though it might be in lieu of supply-side issues could be an antithesis to hard-earned financial stability of RBI," said Soumya Kanti Ghosh, group chief economic advisor of the State Bank of India group.  

“With credit growth languishing at 5-6 per cent, the withdrawal of liquidity support will likely be gradual, like in most other countries," said Sanyal of Bandhan.