WHAT TO EXPECT FROM RBI?

about 4 months ago
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There are expectations but at the same time, those are of no changes.

RBI is expected to maintain a status quo – expectation of ‘no expectation’ that in short is what the market is looking ahead at tomorrow.

And in the current scenario, it makes perfect economic sense too to sit tight. RBI has made it amply clear that its focus will be on growth and only growth as it feels that the monster of inflation is pretty much penciled in. Thus going by the Manufacturing PMI for May, which slid to a 10-month low and the Services PMI - contracted for the first time in 8-months, growth will pretty much dominate the tone of the policy tomorrow.  

What about inflation then? CPI for April fell from 5.52% to 4.29% and for the fifth consecutive month, it was on the upper band of RBI’s target of 4% with a 2% band on either side, for five years till March 2026. On the other hand, WPI was at a 11-year high if 10.49%; this seems all the bigger when we look at the early 2021 numbers – WPI in Jan was at 2.03% and in Feb at 4.17%.

RBI, well, it will pay no heed to WPI; it will look only at CPI. Though a normal monsoon will help, given the surge in overall commodity prices, it is most likely that CPI will only rise in the coming months. But then again, this will not mean that RBI will shift focus from growth and resort to hike in interest rates to rein in the CPI. RBI will continue to remain “accommodative” till we see a sustained recovery.

And that’s how it should be – currently, growth is imperative and the Govt, along with RBI should do everything to give impetus to growth and create the much needed employment in the country. We have the advantage of a very young population but if that it not put to good use, it could become disastrous.

So, does that mean, given the status quo expected tomorrow, we should give the policy a complete miss. Nope! We need to watch out for the following :

1: GDP targets – given the second wave and intermittent lockdowns, we need to see if growth targets are tapered downwards from its target of 26.2% in Q1FY22, 8.3% for Q2, 5.4% for Q3 and 6.2% for Q4.

2: GSAP - Government Securities Acquisition Program or GSAP or simply put, Quantitative Easing. Will we see a more aggressive GSAP this time to soothe the frayed bond markets?

3: Will there be specific measures to combat the pandemic, mainly a temporary moratorium?

4: What’s the stand on inflation?

Well, lets see where this heads tomorrow while the market continues to rejoice over 52k.

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