Will RBI raise rates in February? Here’s what policy panel’s meeting indicates

In its bi-monthly monetary policy review earlier this month, the Reserve Bank of India (RBI) chose not to tinker with benchmark lending rates and, instead, opted to wait and watch. But that could change at the RBI’s next review in February.

According to the minutes of the central bank’s Monetary Policy Committee meeting, the panel has begun debating the normalisaton of ultra-loose monetary policies as the fear of inflation gets stronger. 

What did the MPC actually decide in December?

The MPC kept the policy repo rate unchanged at 4% and the reverse repo rate at 3.35%. The MPC also decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis.

Significantly, the MPC's announcement was just around the time when the scare of the new Omicron variant had just started.

What held the central bank back?

The central bank held back on raising interest rates due to the uncertainty around the spread of the Omicron variant of the coronavirus. Omicron has become the dominant strain across several countries like South Africa and the UK, and is now leading to an exponential rise in cases across the US. 

But the tone of the minutes of the meeting suggest that the rollback could begin in the next meeting in February. 

So, what is the MPC’s overall assessment?

The overall assessment points to some easing of growth concerns and inflation getting more attention.

Economic activity appears to have surpassed its pre-pandemic level, continued recovery is likely during the rest of 2021-22, and the prognosis is for healthy growth in 2022- 23 as well. 

However, IIM-Ahmedabad professor Jayanth R Varma, an external member of the MPC, disagreed with other members on the decision to continue with the accommodative stance as long as necessary, the minutes show.

What do the RBI’s quarterly estimates of economic growth look like?

External member Shashank Bhide, a senior fellow at the NCAER, noted that the quarterly GDP estimates point to a continued expansion of the economy on a year-on-year basis. GDP at constant prices rose by 8.4% in the July-September period, following the increase of 20.1% in the previous three months. The July-September growth estimates are higher than 7.9% projected in the October meeting of the MPC.

On the other hand, there is increasing evidence of inflation becoming persistent in the upper region of the tolerance band, though it is projected to remain within the band, Varma said.

What did the MPC members say on inflation and the systemic risk it could pose?

Members acknowledged that core inflation remains elevated and sticky. “In this milieu, we need to be eagle-eyed for the pass-through of producer prices to retail levels and be ready to act should the need arise. If growth improves further, we should use the opportunity to nudge inflation and inflation expectations down,” said Mridul Sagar, MPC's member secretary.

The November wholesale prices index (WPI) inflation, a proxy for producers’ prices, touched a new high of 14.2% and retail inflation rising above the RBI’s 4% target at 4.9%. Even the household inflation expectations remained at double-digit levels over the three-month and one-year time horizons.

What did RBI governor Shaktikanta Das have to say about the state of the economy?

Das had a note of caution stressing that the journey of monetary policy is hardly smooth in the best of times and is going to get more challenging. At the same time, he underscored the need to have a firm understanding of the impact of the Omicron variant.

“The calibration and timing of a monetary policy response and preventing build-up of financial stability risks are very important in such an uncertain environment,” he said.

So, what could be the next step that the RBI may take?

External member and IGIDR professor Ashima Goyal felt that the next step was to decrease excess durable liquidity itself and said that some of this will be absorbed as growth rises.

“Banks are already raising some deposit rates in anticipation of a rise in credit. Even as excess aggregate liquidity reduces, RBI policies targeting liquidity at stressed sectors must continue,” she added.