The Reserve Bank is most probable to end its tolerance for high inflation with a surge in the interest rates in the first half of 2022, analysts averred on Friday. The central bank will also start rolling back its accommodative policies which have led to easy liquidity conditions, they added. The opinion came into light when inflation decreased to 5.6 per cent in July, after two months of breaching the upper end of the RBI’s tolerance scale at 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. On Thursday, Finance Minister Nirmala Sitharaman concluded that the current situation does not allow withdrawal of the accommodative measures.
“The RBI has been tolerant of inflation and has stayed accommodative to support growth given the deep hit suffered by the economy. But it appears to be reaching the end of tether as inflation remains elevated,” rating agency Crisil said.
“If this pressure (on inflation) continues and systemically important central banks, especially the (US) Fed, begin normalising, the RBI will start to roll back accommodation. We expect the RBI to make a more definitive statement by this fiscal end, and raise rates by 0.25 per cent,” it added.
The peer company, 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.
Subsequently, the central bank wants to multiply the reverse repo rate by 0.40 per cent to shorten the difference between repo and reverse repo rate by 0.25 per cent in February 2022, the company said, also 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 added.
Japanese brokerage Nomura’s analysts averred, “Last week’s review had signs of RBI policy pivoting towards normalization, pointing out to one of the members of the monetary policy committee also dissented against the “accommodative stance” and the increase in FY22 headline inflation target to 5.7 per cent.”
“The August policy meeting already bore initial signs of a policy pivot via calibrated liquidity normalisation. We believe this will be followed by the phasing out of durable injectors of liquidity, a 0.40 per cent reverse repo rate hike (in December quarter) and 0.75 per cent of repo/reverse repo rate hikes in 2022,” it added.