Inflationary pressures are expected to be higher in the coming quarters – Acuite Ratings


Mr. Suman Chowdhury, Chief Analysis Officer, Acuity Ratings & Research comments on the MPC on December 8, 2021

“While we expected a partial likelihood of a slight hike in the repo rate at the December 21 MPC policy meeting, the central bank stuck to its principle of ‘gradualism’ as the risks to the decline for a sustainable growth path have clearly increased due to the spread of a new variant of Covid. MPC kept the growth forecast for FY22 at 9.5% but slightly reduced the GDP forecast for the third year of fiscal year 22 at 6.6%, reflecting concerns about uncertain global growth as well as high commodity prices.

What is worth noting is RBI’s dovish stance on inflation; although he highlighted his concerns about high levels of core inflation and pressures on input costs, he continued to hold his forecast for the average headline CPI at 5.3%. RBI continues to welcome reductions in retail fuel taxes and measures taken by the government to moderate the prices of food categories such as edible oil and pulses. We believe, however, that inflationary pressures should be stronger in the coming quarters if consumer demand picks up steadily, given expectations of persistent supply constraints in some sectors.

The RBI, however, continued to focus on “liquidity rebalancing” as planned. VRRR auctions will continue to be the primary tool for cash management and auction amounts are expected to increase to Rs 6.5 lakh Cr – Rs. 7.5 lakh Cr in Dec-21. At the same time, the auctions will have a higher proportion of 28 days compared to the primary duration of 14 days. A few more steps were taken to normalize excess liquidity by reducing the additional amount that was eligible under the MSF. In addition, banks were allowed to prepay all their TLTRO withdrawals in order to optimize their liquidity position. Interestingly, there has been no indication of the path for rates, even on the reverse repo front. This makes it difficult for us to predict the next steps on the yield front. “


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