RBI Likely To Revise Inflation Outlook As It Extends Rate Pause, Say Economists

The MPC report will be a key takeaway on how the RBI plans to support the government’s Rs 14.31-lakh crore debt programme, while keeping the sovereign’s borrowing costs in check

Reserve Bank of India Governor Shaktikanta Das will present the MPC report on Friday at 10 am. Image: Getty

New Delhi: The Reserve Bank of India (RBI) may raise the outlook of inflation to reflect sharp rise in crude oil, according to a report by Bloomberg.

However, the report suggested that the six-member Monetary Policy Committee (MPC) of the RBI may leave borrowing costs steady and tap other policy tools it’s used before to support an economy facing risks to recovery.

An all economists’ survey conducted by Bloomberg expect the MPC to hold the benchmark repurchase rate at 4 per cent on Friday, while just three out of 27 polled see a hike in the reverse repurchase rate.

As investors look for signs of normalising monetary settings, this will shift the focus to any adjustments in language in the policy statement.

RBI Governor Shaktikanta Das will present the MPC report on Friday at 10 am.

The MPC report will be a key takeaway on how the RBI plans to support the government’s Rs 14.31-lakh crore debt programme, while keeping the sovereign’s borrowing costs in check when faster global policy normalisation is pushing yields higher.

The Centre is seeking a boost in spending on infrastructure, creating jobs, and increasing productivity in the economy.

According to the report, expectations are for the RBI to revive open-market operations or resort to Operation Twists, wherein it buys longer bonds and sells shorter-dated notes, to support the market amid record debt supply. Both measures were employed by the bank during the height of the pandemic, although traders aren’t expecting an announced purchase plan.

Citigroup economists Samiran Chakraborty and Baqar M Zaidi wrote in a note that the RBI will have to buy bonds worth Rs 2 lakh crore to Rs 2.5 lakh crore (25 per cent-30 per cent) of the fiscal first-half borrowing for the programme’s smooth passage.

Some economists expect the RBI to extend a policy that allows banks to hold a higher proportion of government bonds without requiring them to book losses from market fluctuations, given benchmark yields are up nearly 50 basis points this year.

Amid the ongoing Russia-Ukraine war and with inflation running above the RBI’s 6 per cent upper tolerance limit, the RBI could bump up its 4.5 per cent inflation forecast for the current fiscal year to factor in risks from higher global food and energy prices.

It will likely assume oil prices at $95 a barrel for the first half of the current fiscal, up from October’s $75 a barrel assumption, Deutsche Bank’s Kaushik Das said. The RBI had pegged oil at $80 in the February policy, MPC member Ashima Goyal said.

The central bank will also adjust the growth forecast for this fiscal year, lowering it by a few notches to 7.5 per cent or more from the 7.8 per cent expansion seen in February, according to Ananth Narayan, a senior India analyst at Observatory Group.