In light of their prior support for unconventional monetary policy and criticism of hawkish policies that over-emphasise the importance of high inflation, Nomura believes the new MPC members are likely to be vocal on liquidity and credit market dynamics and may not shy away from advocating the RBI’s use of the unconventional or untested measures.
Rahul Bajoria, chief India economist at Barclays, too, shares this view and says that the appointments will not dramatically change the near-term monetary policy outlook.
Rising inflation, according to economists, is another cause for concern. While high food inflation
poses a near-term risk, the third quarter of the current fiscal (October – December 2020) should mark the peak at around 6.8 per cent.
In its last policy meeting, the RBI’s six-member monetary policy committee
voted unanimously to hold interest rates. Although the statement acknowledged the room for further rate cuts, the commentary made future rate cuts contingent on a “durable reduction” in inflation.
“Given our new inflation forecast trajectory, we believe that room to cut rates further will likely open up only in Q1 2021. Hence we expect a one-off rate cut of 25bp in the February 2021 MPC meeting. In the meantime, the central bank may continue to ease financial conditions through liquidity and regulatory measures,” said Bajoria of Barclays.
Those at Nomura expect inflation to trend lower over the next 6 – 12 months due to favourable base effects, falling towards 4.5 per cent for most of 2021.
“We expect current stagflationary conditions to ease starting in Q4, with a more permanent impact on trend growth and a more transitory inflation surge. As such, we expect 50 basis point (bp) in cumulative rate cuts, delivered in doses of 25bp each in December and February 2021, with growth remaining below trend,” Varma and Nandi of Nomura said.