Citizens' MPC's policy expectations: RBI to hold rates; focus on core inflation

“Central banks around the world are confronting, how much of this inflation is transitory and pandemic induced and how much is going to last. In India’s case, it is a bit of both in the sense that, some of the recent spikes in core have been because of the second wave and the lockdowns. But I think there are two things that that the MPC will focus on. One is that if you just take a more holistic view of inflation over the last 18 months a core inflation has averaged above 5 percent since the pandemic began. So this is not a two or three month phenomenon, it actually lasted over the last 18 months. The second thing that is unique about India, vis-à-vis the US, for example, is that we have actually seen inflation expectations move up. Again, if you take March last year as your starting point, the RBI’s own household survey has inflation expectations up between 100 and 150 basis points, depending on which measure you look at. The reason the Fed can be even more patient is because they don't think inflation expectations are at the place where they wanted to be. So I think there is no doubt that there is a durable component to India's core inflation, and inflation expectations increasingly, that are going to, impact the MPC" - Sajjid Chinoy

"We can debate a lot about the transitory versus the permanent component of inflation and what this exceptional stimulus is doing to inflation. But, if you just simply look at the commodity prices, it appears to be a mixed bag, where we think that metal prices will remain significantly elevated can go up from current levels. But energy prices after seeing a peak out in third quarter of the calendar should stabilise and we are already seeing that agricultural prices starting to cool off. So, with that backdrop, global inflation we think is going to average around the 3 percent mark and global growth is going to be around 5.9 percent for the full year 2021.” - Samiran Chakraborty

“I think the way our guides are looking at it is that we are past the peak optimism on global growth. But at the same time, we are probably past the peak anxiety on global inflation as well. So in a sense, what is going on here is that in most countries, the max stimulus is already behind us. We are seeing some amount of slowdown in China happening in the second half of the calendar year, and we are seeing the third wave to some extent, affecting global activity as well. So, these are the three channels to which the headwinds to demand is coming." - Samiran Chakraborty

“We don’t think RBI is going to revise the growth numbers. It does appear now that the hit from second wave is perhaps less than what was feared which is not surprising to us and the recovery has also been quite swift. But more recently we have again started seeing cases pickup not just in Kerala and North east India but across the number of other states also. So I think while the rebound has been stronger than expected the assessment of whether the recovery is durable or sustainable cannot be convincingly made right now and therefore I agree with Sajjid that the RBI is likely to revise up its inflation forecast, but the GDP forecast will be retained.” - Sonal Varma