RBI Likely To Leave Rates Unchanged For This Fiscal, Says Report

The key repo rate has been at 4 per cent since May 2020, an all-time low, even though bond yields have been heading north for many months now

New Delhi: The Reserve Bank of India (RBI) likely to leave rates unchanged next week, recognising growth-focused and capex-driven fiscal expansion, according to US brokerage Bank of America Securities.

The Monetary Policy Committee (MPC) of the RBI will begin its deliberations next Monday and announce the policy moves on Wednesday (February 9) in the backdrop of a massive spike in bond yields after the Budget. Almost all major central banks in the world are in the process of increasing rates to tame inflation.

The key repo rate has been at 4 per cent since May 2020, an all-time low, even though bond yields have been heading north for many months now.

According to the brokerage firm, the RBI will only adopt a gradual policy normalisation path for now, despite bigger fiscal support and faster rate hikes expected from the US Federal Reserve.

Barring some measures to stabilise the yields, which have already risen above the 2019 levels and sniffing at the 6.9 per cent mark after the Budget announced record borrowing plans next fiscal, the brokerage sees the overall domestic and external environment being unfavourable for the bonds market.

BofA analysts said they see the MPC leaving rates unchanged on February 9 when the RBI will unveil the last policy review of this fiscal year and undertake gradual tightening measures.

The market has been expecting a 25 bps reverse repo tightening. Its assumption got cemented when the Budget announced a record borrowing plan, gross borrowing at Rs 14.95 lakh crore and net borrowing of Rs 11.6 lakh crore (much higher than BofA estimates of Rs 13 lakh crore and Rs 9.6 lakh crore).

Although in headline terms, fiscal deficit is expected to fall from 6.9 per cent in FY22 (up 10 bps from the revised estimate) to a budgeted 6.4 per cent in FY23, the brokerage expects the provisional actuals for FY22 fiscal deficit to come in line at 6.8 per cent and at 6 per cent next fiscal, BofA said in a note on Friday.