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UBS Securities sees the Reserve Bank of India (RBI) going in for policy normalisation in the second half of FY’22 (2021-22) as India makes rapid progress in its ongoing vaccination drive.
We expect policy normalisation as 36 per cent of the Indian population will get inoculated by end of this calendar year, if the current rate of 3.5 million doses per day were to be sustained, said Tanvee Gupta Jain—India Economist, UBS Securities.
‘Fragile economy’
“RBI cannot afford to do any policy normalisation now especially when economic recovery is fragile. However, we do expect the central bank to go in for policy normalisation in the second half of FY’22 to keep inflation pressures contained as well as preserving financial stability,” she said.
At a base case, the Monetary Policy Committee (MPC) will shift from an “accommodative” stance to a “neutral” policy stance in the December or March quarter of FY’22 and pursue 25-40 basis points reverse repo hike. “We are not expecting any policy rate hike in FY’22 or first half of FY ‘23. We are expecting a repo rate hike of 50 basis points in the second half of FY’23”, she said.
Also read: Economy expected to rebound strongly in 2021-22: RBI
RBI’s trilemma
Asked as to what could prompt the central bank to go in for policy normalisation in the second half of FY’22, Jain said that it would be difficult for the central bank to continue to manage the trilemma of keeping the cost of capital low, keeping Indian rupee stable and keeping inflationary pressure under control to preserve macroeconomic stability risk—manage all conflicting objectives at the same time.
Meanwhile, Jain said that UBS Securities had no immediate plans to revise its earlier GDP forecast of 11.5 per cent for 2921-22 despite the latest second wave of Covid-19 affecting the country.
“We will wait and watch to see what other States will do. The latest restrictions by Maharashtra will have an impact on GDP estimates, but we are not revising our estimate only because of this. Definitely, the likelihood of upside surprise that we were expecting a few months back has now been neutralised because of the resurgence in Covid-19 in recent weeks”, she said.
The run rate for vaccination in India has picked up from 0.4 million doses per day in February to 2.7 million doses per day on seven-day average. The last three days average in India has been 3.5 million per day. India is currently third to China on a seven-day moving average. While China is giving 4.6 million doses per day, the US is at 2.8 million doses per day.
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