HDFC Bank has said that the market may be shocked after RBI’s monetary policy review
As the Monetary Policy Committee of the Reserve Bank of India (RBI) is set to announce its decision on key rates tomorrow, April 8 and though a consensus may be reached to keep the repo and reverse repo rates unchanged, HDFC Bank’s The Treasury research team has indicated that markets may be surprised if they expect the central bank to sing in line with the dovish tune set out in February’s policy.
In its note, HDFC Bank’s research team has pointed out that there has been a significant change in the global as well as domestic outlook since the last RBI policy in February 2022.
“Geopolitical tensions and the US Fed’s growing flurry have an impact on everything from inflation to the rupee. While it is true that there are countries that are distracted by the Fed’s flamboyant rhetoric – and India has to maintain rates. There is probably some room to hold. Unchanged for now, but a prolonged divergence could be volatile. We think perhaps it is time that RBI can start aligning itself with other major central banks. At least domestic conditions warrant or justify such change as soon as possible,” it noted.
HDFC Bank further said that inflationary pressures are mounting not only on account of hike in petrol and diesel prices, but also due to higher transportation costs, which are affecting the prices of almost all other goods.
“We suspect that the RBI may recognize these inflationary risks and may even provide some indication of a change in stance to neutral in its forward guidance. This is reflected in the RBI’s inflation forecast of 4.5 per cent. 5.2 to 5.5 per cent average for 2022-23, while the growth projections for the current fiscal may remain unchanged at 7.8 per cent,” the bank said in its research note.
Moreover, as the economy recovers from the pandemic, a high liquidity surplus may also not be justified and the central bank may consider easing it in the coming months. This will again clash with limiting yields. HDFC Bank further said that the recent $5 billion dollar-rupee swap has opened up room for bond interventions in the near term, but the volume is less in rupee terms.
“Squaring this fine balance between the rupee beyond a threshold, no rate hike, liquidity surplus, moderate inflation and a cap on yields can be difficult, especially with increasing global pressures,” it explained.