The Reserve Bank of India (RBI) may be hitting the end of its tolerance for high inflation and will most likely hike interest rates in the first half of 2022, analysts said. The central bank will also start rolling back its accommodative policies which have led to easy liquidity conditions, they said.
The view from analysts came even as inflation cooled down to 5.6 per cent for July, after two months of breaching the upper end of the RBI's tolerance band of 6 per cent.
The central bank has been keeping the status quo on policy and continuing with the accommodative stance to help revive GDP growth. Finance Minister Nirmala Sitharaman had opined that the current conditions do not warrant withdrawal of the accommodative measures.
Finance Minister Nirmala Sitharaman stated that the current circumstances do not allow the removal of the supportive measures. "Given the economy's severe downturn, the RBI has been tolerant of inflation and has remained accommodative to assist growth. However, as long as inflation stays high, it appears to be reaching the end of its rope “
According to Crisil, a rating agency. "If the pressure on inflation persists and systemically important central banks, particularly the (US) Fed, begin to normalise, the RBI will begin to tighten its monetary policy. By the end of the fiscal year, we expect the RBI to make a more definitive statement and hike rates by 0.25 percent" It was mentioned.
Its peer Acuite said it expects policy normalisation to begin in a gradual fashion with comfort on vaccination, clarity on fiscal stance, and global rates setting and called the increase in the quantum of variable reverse repo auctions as the first small step towards the same objective.
Next, the central bank can look at increasing the reverse repo rate by 0.40 per cent to narrow the difference between repo and reverse repo rate to 0.25 per cent by February 2022, it said, adding that the repo will be unchanged at 4 per cent.In parallel, the vaccination drive is expected to lead to herd immunity and thereafter, the RBI will follow up with a 0.25 per cent rate hike in April 2022, it said
Analysts at Nomura, a Japanese company, said there are signals that RBI policy is shifting toward normalisation, noting that one of the monetary policy committee's members also opposed the "accommodative stance" and the hike in the FY22 headline inflation goal to 5.7 percent.
"Initial signals of a policy pivot via calibrated liquidity normalisation were visible at the August policy meeting. We anticipate the phase-out of durable liquidity injectors, a 0.40 percent reverse repo rate hike (in the December quarter), and 0.75 percent repo/reverse repo rate hikes in 2022” It was stated.
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