Reserve Bank of India (RBI) governor Shaktikanta Das is widely expected to announce a status quo in his statement on Friday after the monetary policy committee (MPC) meeting. However, the market is keenly awaiting the RBI’s road map for normalizing liquidity in the wake of the government’s oversized borrowing program, which has pushed up bond yields.
“The notable decline in retail inflation in December 2020 does provide the RBI headroom to ease monetary policy going forward. However, we do not expect a policy rate cut at the forthcoming monetary policy owing to the concerns around core inflation coupled with widening fiscal deficit and normalization of economic activities, which could weigh on the inflation outlook,” said Care Ratings chief economist Madan Sabnavis. “We expect the accommodative monetary policy to continue,” he added.
The RBI had last month said that it had entered the phase of normalizing liquidity. The use of this term was seen as a signal that the central bank would be draining out the surplus funds that it had flooded the markets amid the pandemic.
The policy has to be growth-supportive as the economy is in a recession, having shrunk for two successive quarters. Das has a tough job of ensuring that the policy supports growth without fuelling inflation at a time when the fiscal deficit is expected to hit 9.5%. He has to ensure that the government borrowing does not crowd out private investments and that bond yields remain low despite an oversupply of government paper.
“On the liquidity management front, we maintain that the policy intent was to tackle the liquidity asymmetry than to tighten its state, and to fix misplaced risk bets in money markets. Thus, the miscommunication loop between the central bank and markets needs to be broken,” said Madhavi Arora of Emkay Global in a report.