The Reserve Bank of India's Monetary Policy Committee (MPC) is likely to retain its accommodative stance without any increase in the reverse repo rate when it announces its decision on monetary policy on Friday, HDFC Bank's Chief Economist Abheek Barua said.
The six-member MPC started its three-day deliberations on the next bi-monthly monetary policy on Wednesday amid rising global commodity prices and the need to contain inflation at home.
The policy repo rate, or the short-term lending rate, is currently at 4 per cent, and the reverse repo rate is at 3.35 per cent.
Explaining his rationale, Barua said that global risk from the China 'shock', the US Fed taper, and apprehensions about the US debt ceiling not getting raised have escalated.
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"These would have supply side effects for industrial intermediates and fuel as well as demand side manifestations as global growth is likely to slow down," Barua said.
Besides, US yields have risen sharply with a knock-on effect on domestic yields. As the US taper gets under way, there could be an outflow of capital affecting domestic liquidity. The domestic output gap remains high and capacity utilisation in the majority of industries is below 75 per cent, while household and SME balance sheets are also impaired and can be best repaired under low interest/ high liquidity conditions.
"Thus, the balance of risks calls for holding action and continuation of the accommodative stance," Barua said.
The RBI is also likely to keep its GDP forecast unchanged at 9.5 per cent, while inflation forecast is likely to be revised down, Barua said. The central bank had projected 5.9 per cent inflation for July-September quarter during its last policy meeting, while that for October-December was at 5.3 per cent.
"We expect inflation to average at 5.1 per cent in Q2 and 4.8 per cent in Q3 FY22. For FY22, we expect inflation to average at 5.35 per cent," the economist said.
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