Reserve Bank of India’s repo rate is expected to remain unchanged during FY22, said Emkay Global in a report.
A lower repo rate, or short-term lending rate for commercial banks, will reduce the interest cost on automobile and home loans, thereby ushering in growth.
However, lower repo rate might trigger inflation as well.
Earlier this month, the Monetary Policy Committee (MPC) of the central bank voted to maintain the repo rate, or short-term lending rate, for commercial banks, at 4 per cent.
Likewise, the reverse repo rate was kept unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the ‘Bank Rate’ at 4.25 per cent.
The MPC outcome was widely expected as India suffers from a massive spike in Covid-19 infections.
“We do not see any rate actions in FY22. We reckon RBI’s focus on keeping the term premia low will gather pace as global financial conditions might start to tighten gradually through the year,” said Madhavi Arora, Lead Economist, Global Financial Service in the report.
“We also expect core inflation to remain high, outdo headline and average comfortably above 6 per cent in FY22. That said, RBI may still take solace in the fact that headline inflation may still average sub 6 per cent in FY22 and thus could justify their policy accommodation.”
On bond yields, she cited that in the near term, ‘we are neutral on bonds amid the central bank’s active support anchored at the benchmark 10-year paper’.
“However, we do see yields inching up in an orderly and gradual fashion in H2FY22.”
“We expect the yield curve to bear-flatten and see benchmark 10-yr yield in the range of 6-6.40 per cent for the remainder of FY22.