RBI may hike rates in March qtr; coal and chip shortages a worry: Nomura

The Reserve Bank is likely to change the stance of its monetary policy and hike rates from the first quarter of 2022, a Japanese brokerage said on Monday.

The central bank will start with liquidity normalisation moves this month, narrowing the difference between the rate at which it funds the system and at which it absorbs excess liquidity in December, Nomura said.

It can be noted that the latest move by the Reserve Bank of India (RBI) last week to narrow the excess liquidity in the system through stated targets is being seen by some as the normalisation of the policy, which has been very accommodative since the onset of the pandemic to boost growth.

The brokerage upped its consumer price index (CPI) inflation target for 2022 to 5.2 per cent from 5 per cent earlier.

Demand remains strong in India, but there are supply-side headwinds in areas like chips which is bothering the auto sector and coal shortages which threatens to put parts of the country into darkness, it said.

The country is reporting coal shortages and power sector companies face the prospect of importing coal at significant cost.

With power demand likely to rise amid the continued economic normalization and upcoming festive sales, supply-side disruptions pose an important near-term downside risk to growth momentum, it warned.

For the week ended last Sunday, its Business Resumption Index rose to 105.1 from 103.4 in the prior week.

"If power outages become more widespread, then industrial output could suffer in the near term, while higher energy costs may squeeze firms' margins and add to consumer price inflation," the brokerage said in the report.