Although the Consumer Price Index (CPI) inflation forecast for March 2021 is expected to reach around 5.6 per cent, the rise in Kovid-19 cases has eased the bullishness of India’s near-term growth outlook. In this context, the Monetary Policy Committee (MPC) will not change the repo rate to 4.0% in its first policy review, in line with the newly revised primary directive to keep CPI inflation within the 2-band. 6%, contributes to growth.
The committee commented that the CPI inflation trajectory is likely to be reversed and suffer from negative pressures. It has increased bumper foodgrain production on the one hand, and high international commodity prices and logistics costs on the other, while at the same time repelling central and state governments from paying taxes and cess on petroleum products.
The MPC has now forecast CPI inflation at 5.0 per cent in Q4FY21, 5.2 per cent in Q1FY22 and Q2FY22, 4.4 per cent in Q3FY22 and rebounded to 5.1 per cent in Q4FY22, while losses are widely balanced. . The expectations of the H12022 and Q3FY22 are slightly higher than its February expectations.
With the MPC estimating that CPI inflation will average 5.0 per cent in FY22, rate cuts are likely to be virtually ruled out unless economic activity is subjected to another deep covid-induced disruption. However, even in the latter case, supply disruptions can cause inflation to rise, which limits the range of monetary policy support to come.
At the same time, the initial rate hike seems rare, with average retail inflation expected to be below the MPC’s medium-term target range of above 6%. Therefore, we continue our view on the widening gap between the repo rate by 2021 and the reverse repo rate during H1 FY22.
Before growth, the MPC hopes that urban demand will strengthen with the roll out of the Kovid-19 vaccine, while rural demand will remain strong with a record crop. Higher government capital expenditure and the product-linked incentive scheme will help boost investment and exports as capacity utilization picks up.
However, in light of the uncertainty created by the rise in Covid-19 cases and declining consumer confidence, the committee maintained real gross domestic product (GDP) expansion at 10.5% in FY22, with the base-effect sharpening to 26.2% in Q1FY22 and 8.3% in the following quarter, respectively. % And 6.2% led to a moderate growth rate.
With the resurgence of localized restrictions, ICRA expects demand to return from H1FY22 to H2FY22, with GDP growth expected to print 10-11% overall for the year.
Importantly, the MPC is committed to maintaining the accommodation attitude as long as it is necessary to sustain growth. In doing so, it gave signals that it would rely on data and move forward. Once the majority of the adult population has been vaccinated with the Kovid-19 vaccine, we expect it to remain cautious and to continue the accommodation attitude during H1FY22, until uncertainty about the growth outlook subsides.
The announcement of the Secondary Market Government Securities (G-Sec) Acquisition Program (GSAP 1.0) will help alleviate the concerns of the bond market regarding the size of central and state government borrowing programs for FY22.
Aditi Nair is the Principal Economist at ICRA Limited.