Agencies new inflation, growth series to set tone; RBI will use OMOs to lift liquidity: Economists
RBI Likely to Hold Interest Rates Amid Rising Inflation
MUMBAI: As inflation trends upward, the Reserve Bank of India (RBI) is anticipated to keep its repo rate steady during its February policy meeting. Economists suggest that the central bank is waiting for critical indicators that will shape the future of inflation and growth, particularly with the introduction of a new base-year series next month. This fresh series will adjust the weights of the consumption basket, reflecting today’s spending habits.
Key Insights for RBI’s Upcoming Policy Decision
– Monetary Policy Committee Meeting: Scheduled from February 4-6, coinciding with the Union budget presentation.
– Inflation Stats: December’s consumer inflation rate stood at 1.33%, with Q3 averaging 0.8%, slightly above the RBI’s forecast of 0.6%. Economists project that the Q4 inflation could align closely with the RBI’s estimate of 2.9%.
– Policy Rate Adjustments: The RBI has cut policy rates by a total of 125 basis points since February 2025, bringing the current rate to 5.25%.
– Future Projections: Dhiraj Nim, economist and FX Strategist at ANZ Bank, believes that inflation may hover above 4% for the next four quarters, suggesting no rate cuts are imminent. He emphasizes the necessity of providing durable liquidity to mitigate upward pressures on borrowing costs.
Anticipated Actions by the RBI
– Injection of Liquidity: Economists expect the RBI to conduct additional liquidity infusions through Open Market Operations (OMO) to ensure systemic liquidity remains in surplus.
– Retail Inflation Outlook: With predictions of retail inflation surpassing 4% over the next year, many analysts foresee that policy rates will stabilize, turning the market’s attention toward the timing and extent of liquidity support.
– Current Liquidity Position: System liquidity turned negative in late December, but by January, it has averaged a tight surplus of ₹36,869 crore, according to RBI data.
– OMO Expectations: Soumya Kanti Ghosh, chief economic advisor at the State Bank of India (SBI), forecasts approximately ₹2 lakh crore in OMOs for the remainder of FY26, with a similar trend projected for the following fiscal year.
– Bank of Baroda’s Contrarian View: In contrast to prevailing expectations, Bank of Baroda anticipates one more repo rate cut in February, citing softer inflation conditions as a rationale for potential easing.
Conclusion
In summary, as inflation is likely to rise, RBI’s approach to maintaining interest rates will be pivotal in navigating the challenges of growth and liquidity. The introduction of a new base-year series will significantly impact consumption dynamics, and the market will closely watch the RBI’s upcoming decisions regarding liquidity support and potential rate changes.