Pre-Monetary Policy (Feb 2022): Kotak Mahindra Life Insurance

7 Feb 2022 , 03:21 PM

“The upcoming MPC will convene in the shadow of FY23 Union Budget, which rightly maintained its focus on growth but at the expense of high market borrowing. In the upcoming meeting, the MPC will likely acknowledge the inevitability of policy normalization and the challenges we face as global central banks accelerate their fight against inflation. However, recent sharp rise in bond yields may already have tightened the local financial conditions a bit too hastily for RBI’s comfort.

We therefore expect MPC to embark on a gradual tightening cycle, tilting its focus a little more on inflation as Brent Crude prices near USD 100 per barrel. To begin with, we expect the MPC to normalize the repo rate-reverse repo corridor (to 25 bps) over the next 2 meetings, starting with a 20 bps reverse repo rate hike in February. Subsequently, the MPC may change its accommodative policy stance to neutral, eventually embarking on a measured rate hike cycle.

With policy normalization underway, RBI’s support to bond markets is expected to remain constrained going forward even as headline inflation remains within the RBI’s target band.Tough as it may be, RBI will have to non-disruptively juggle between its objectives on policy normalization and management of government’s borrowing program in FY23.”

The author of this article is  Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company Limited

The views and opinions expressed are not of IIFL Capital Services, indiainfoline.com