Will Omicron scare force RBI to maintain the status quo on rates?

As global central banks fear being ‘behind the curve’ amid sticky inflation, India’s Reserve Bank of India is huddled up on Mint Street to discuss its bi-monthly policy. The apex bank’s monetary policy outcome, which will be announced tomorrow, assumes importance as the US Federal Reserve no longer see inflation being ‘transitory’. That apart, economic uncertainties are also rising amid a new variant of coronavirus. In a Business Standard poll of 16 economists and bond market experts, the consensus emerged of a status quo policy on the repo rate at four per cent, and the stance being “accommodative”. While six expected a sure hike in the reverse repo rate, 10 said the rise of the Omicron variant might not allow the RBI to do that. One among the 10 said a reverse repo hike could be done outside the formal policy, because it is at the sole discretion of the RBI and not the remit of the six-member monetary policy committee. The significance of RBI governor Shaktikanta Das’s statement tomorrow will be the central bank’s outlook on economic recovery. The RBI has, so far, refused to hike rates, stating that any hasty withdrawal would jeopardise the nascent recovery. If the Omicron variant does not cause widespread disruption, economists expect the full-year growth expectation of the RBI, at 9.5 per cent, to be met. According to Sonal Varma, who is chief economist for India and Asia ex-Japan at Nomura, even though the Omicron variant does add to uncertainty, the baseline view still points to inflation rising towards the upper-end of the RBI’s 2-6% target. Given this, the brokerage expects a 40-basis point reverse repo rate hike, and a cumulative 75 bps of repo and reverse repo rate hikes in 2022. For Rahul Bajoria, chief India economist at Barclays, the recovery in activity levels, along with signs of an elevated inflation path, will push the RBI closer towards policy normalisation. However, he says, the pace and quantum of the normalisation of the policy corridor remains uncertain. Therefore, in his base case scenario, the RBI may go for 20bp hikes in the reverse repo rate in both the December and February MPC meetings. In sum, the economy is recovering but it may be difficult for the RBI to consider high inflation as “transitory”.

Besides, nobody knows how serious the threat of Omicron is. Therefore, even if the RBI maintains a status quo on the policy, keeping a hawk-eye on the evolving pandemic picture, a rate hike in February is certain if there is no third wave, driven by Omicron. As regards today, equity markets may be volatile as investors remain cautious ahead of the policy outcome. Further, developments around the new coronavirus variant and policy response of various governments will also guide the market trajectory. Stock-specific news flow, global cues and commodity prices will sway the sentiment. In the primary market, RateGain Travel Technologies Ltd is opening its three-day initial public offer today. The company has fixed a price band of Rs 405-425 per share and hopes to garner close to Rs 1,336 crore at the upper price band of the offer. The BSE Sensex fell 949 points yesterday to end the day at 56,747. The Nifty50, on the other hand, ended 284 points lower at 16,912.

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