Expect RBI to Start Hiking Rates From 2022

Rajani Sinha, Chief Economist and National Director - Research, Knight Frank India shares her perspective on the upcoming RBI Monetary Policy to be announced on December 8. RBI has started the process of normalization by mopping out excess liquidity from the system through enhanced VRRR auction and suspending the G-SAP. There was growing expectations that in the December MPC meeting, RBI would hike the reverse repo rate to narrow the corridor between repo and reverse repo rate. However, the new COVID variant Omicron has again pushed the global and Indian economy in a state of uncertainty and nervousness. There is also added uncertainty of any knee-jerk reaction of Indian and global financial markets to Fed’s monetary policy indication/action. In such a scenario, RBI in its upcoming meeting is likely to keep the rates on hold. On the growth front, while most economic indicators have surpassed pre-Covid levels, there is still a lot of slack in the economy. Hence RBI may decide to wait and watch till the next MPC meeting in February 2022. RBI will be concerned about inflationary pressure building in the economy. Currently the upward pressure on inflation is because of high commodity prices and supply bottlenecks. However, with economic growth gathering momentum, there is threat of further demand side pressure on inflation. We can expect RBI to start hiking rates from 2022. RBI will also narrow the corridor between repo and reverse repo rate, with sharper hike in reverse repo rate. The quantum of rate hike will be dependent on how the COVID scenario pans out and its subsequent impact on economic growth in 2022”.