RBI likely to revise inflation outlook as it extends rate pause: Economists

India’s central bank will likely raise its inflation outlook this week to reflect costlier oil, but leave borrowing costs steady and tap other policy tools it’s used before to support an economy facing new risks to recovery. 
 

All economists surveyed by Bloomberg expect the Reserve Bank of India’s six-member monetary policy committee to hold the benchmark repurchase rate at 4% Friday, while just three out of 27 polled as of Wednesday see a hike in the reverse repurchase rate.

That will shift the focus to any adjustments in language in the policy statement, as investors look for signs of normalizing monetary settings.

Here’s what to watch for in Governor Shaktikanta Das’s speech after the MPC meeting at 10 a.m. in Mumbai on Friday:

Policy Toolkit
 

The key takeaway from Das will be on how the RBI plans to support the government’s 14.31 trillion rupee ($189 billion) debt program, while keeping the sovereign’s borrowing costs in check when faster global policy normalization is pushing yields higher.

Keeping a lid on costs is crucial for Prime Minister Narendra Modi’s government as it seeks to boost spending on infrastructure, creating jobs and increasing productivity in the economy.  

Expectations are for the RBI to revive open-market operations or resort to Operation Twists, wherein it buys longer bonds and sells shorter-dated notes, to support the market amid record debt supply. Both measures were employed by the bank during the height of the pandemic, although traders aren’t expecting an announced purchase plan. 

The RBI will have to buy bonds worth 2 trillion rupees to 2.5 trillion rupees, or 25%-30% of the fiscal first-half borrowing, for the program’s smooth passage, Citigroup Inc. economists Samiran Chakraborty and Baqar M Zaidi wrote in a note. This week’s policy should provide some guidance on that, they said. 

Some expect the RBI to extend a policy that allows banks to hold a higher proportion of government bonds without requiring them to book losses from market fluctuations, given benchmark yields are up nearly 50 basis points this year. To do so, the central bank may possibly extend the higher 22% held-to-maturity limit by one more year compared to 19.5% previously, according to Deutsche Bank AG. 

Language Change

Das’s speech will also be closely watched for any change in language that signals a beginning of the end of the current easing bias.

Since October 2019, the central bank has said it will “continue with the accommodative stance as long as it is necessary to revive growth,” adding from March 2020 a reference to Covid-19.

“In the April meeting, we expect the RBI to raise its inflation forecast and prepare markets for future changes via a revised forward guidance,” said Pranjul Bhandari, chief India economist at HSBC Holdings Plc. “Rate changes will likely follow in subsequent meetings.” 

Outlook Revision

With inflation already running above the central bank’s 6% upper tolerance limit, the RBI is expected to bump up its 4.5% inflation forecast for the current fiscal year to factor in risks from higher global food and energy prices due to the Ukraine conflict. 

“Evolving risks are likely to challenge the RBI’s sanguine view on fiscal 2023 inflation, prompting a 50-100 basis points upward revision,” DBS Bank Ltd. senior economist Radhika Rao wrote in a note. 

The RBI will likely assume oil prices at $95 a barrel for the first half of the current fiscal, up from October’s $75 a barrel assumption, Deutsche Bank’s Kaushik Das wrote in a note. The RBI had pegged oil at $80 in the February policy, MPC member Ashima Goyal said in a recent interview. 

The RBI will also adjust the growth forecast for this fiscal, lowering it by a few notches to 7.5% or more from the 7.8% expansion seen in February, according to Ananth Narayan, a senior India analyst at Observatory Group.