The RBI is considering April’s monetary policy (a decision to be announced on April 7) under a major uncertain and unstable environment, globally and regionally. Submit fiscal policy of February 2021, US interest rates have continued to sell sharply (thus having a negative impact on Indian business yields), while global oil prices have shown instability, with Brent currently at 20 -25% higher than the end of December 2020 rates. And at home, new Covid-19 cases have risen sharply since the beginning of February, raising questions about the potential negative impact on growth.
Contrary to past experience, we expect the overall monetary policy statement to be as neutral as possible, with growing risks due to the increase in Covid-19 cases driven by perceived uncertainty in terms of inflation, from higher oil prices and persistent strong inflationary pressures. Although the current draft inflation rate of 4% in the middle of the CPI point (within +/- 2% band) is maintained over the next five years, excluding inflation which is the second basis for monetary policy decision, we assume that members of The MPC will focus on changing the base of inflation (as they did in the past) to inform their monetary policy decisions in the future.
Monetary policy status: We expect the monetary policy stance to remain unchanged not only in the next April policy, but at least until June policy, due to the uncertainty caused by the sharp increase in Covid-19 cases in the country, which could slow down the current growth rate, if localized closures were widely used quarterly. April-June 2021. We expect the MPC to abide by the direction from the previous policy stating that “continued policy support is essential, until the prospects for a secure recovery are well underway while monitoring the changing inflation outlook.” We are not sure if the MPC will make it clear that it is ready to maintain a minimum wage of at least 1HFY22 (until the end of September 2021), but this may be possible, if members assess the risk of growth due to the second Covid-19 wave high compared to the effects of inflation over the next six months.
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Low yield curve control : We expect that the monetary policy statement also states that the RBI will purchase at least Rs 3 trillion bond bonds from FY22 to provide bond market support and ensure that financial market conditions remain in place, in line with broad-based monetary policy, but we do not see RBI provides an OMO calendar ahead of time. The government has announced its decision to borrow Rs 7.24 trillion from 1HFY22 (about 60% of the total Rs 12 trillion FY22 market), and now market participants will eagerly wait to see how much the RBI will want to buy from -1H of FY22 to Rs 3 trillion total purchases expected at FY22 central bank.
Liquidity operations : With regard to cash flow performance, we expect the RBI to reiterate that the remaining funds will be sufficient to finance growth and that the space created by the CRR transformation will be adjusted to the OMO acquisition of bonds to help close the gap between bond demands. While we expect the reverse repo rate to double (by 20bps clips each) in the second half of 2021 (either August / December or October / December), to 3.75% by the end of the year (from the current average -3.35%), we do not think the RBI will provide anything that indicates that in the forthcoming policy.
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Growth and inflation forecasts : We expect the RBI to revise its inflation forecast for January-March 2021 to 4.8-4.9% (from 5.2% previously), while keeping forecasts for April-June 2021, July-September 2021 and October -December 2021 at 5.2%, 5.0% and 4.3%, respectively. The RBI, in our view, has already taken an unpredictable forecast of CPI inflation at 1HFY22 and therefore, we do not see the need to adjust the forecast to be too high at this time. In fact, our CPI (quarterly) forecast for April-June 2021 and July-September 2021 decreased slightly to 4.7% and 4.6%, respectively, with the October-December 2021 CPI rate similar to that of the RBI’s (4.3%). We expect the MPC to highlight the potential risks to CPI inflation from rising oil prices (although global oil marketing markets have emerged as Brent approaches approximately $ 70 / barrel) and the dynamic inflationary pressures. I do not see the need for the RBI to change its forecast at this stage.
We do not expect the central bank to change its FY22 growth forecast (+ 10.5% real GDP growth) in this segment, despite rising Covid-19 cases, as the RBI forecast, which is exactly the same as our growth forecast, already maintains and builds on factors various potentially dangerous. The latest February financial data shows that total expenditure increased by 52.9% of the fall after a 49.5% increase in January. Spending momentum will remain strong in April-June 2021 again, unlike last year when India invaded the country. The latest BOP data also shows that India’s current account balance has already turned into a small amount by October-December 2020 ($ 1.7 billion; 0.2% of GDP), which will continue to grow steadily in the next several years. Therefore, in addition to the increase in Covid-19 cases, we assume that the real GDP growth of April-June 2021 will be approximately 25.5% of you (RBI forecast is 26.2% of you), which should lead to a growth of Actual GDP of 10.5% of FY22.
