Omicron may force RBI to delay policy normalisation

As Covid-19 infections spike in the country resulting in restrictions in various states and impacting the fragile recovery, many economists are expecting RBI to delay the policy normalisation move, which is expected in the February review.

The country has reported a single-day rise of 58,097 new Covid-19 cases as of Wednesday morning--the highest in around 199 days -- of which 2,135 are Omicron cases and later in the day, the first confirmed Omicron-related death has also been reported.

Maharashtra recorded the maximum number of 653 Omicron cases followed by Delhi at 464, Kerala 185, Rajasthan 174, Gujarat 154 and Tamil Nadu 121 cases, taking the total tally of cases to 3,50,18,358.

The active cases were recorded above 2 lakh after around 81 days and the Covid toll has climbed to 482,551 with 534 daily fatalities.

HDFC Bank chief economist Abheek Barua does not see the RBI-monetary policy committee (MPC) going ahead with the policy normalisaiton drive anytime soon, at least not in the next review in February as he expects the rising Omicron cases to shave 30 basis points off the March quarter GDP.

“Rate hike expectations will moderate as the growth gets impacted and the reverse repo hike expected in February is also uncertain now,” Barua said in a note, adding the central bank will continue with its focus on liquidity normalisation and capping yields.

Similarly, Tanvee Gupta-Jain, the chief economist at UBS Securities India also expects the central bank to remain in “wait-and-see mode” for some more time.

“If the risks surrounding the new Omicron variant remain, adding to near-term uncertainty, we think the MPC could remain in "wait-and-see" mode at the February policy meeting and can delay policy normalization to the April policy meeting,” she said.

Echoing similar views, Icra Ratings chief economist Aditi Nayar said the Reserve Bank will remain in a hold mode for an extended time given the rising risks to fragile growth.

“Given the surge in COVID-19 cases and the widening of restrictions leading to heightened uncertainty, it is increasingly unlikely that the RBI will commence the much-delayed policy normalisation next month itself, unless inflation provides an acutely negative surprise, which looks all the more unlikely” Nayar told PTI.

Nayar also revised down the Q4 growth forecast by 40 basis points to 4.5-5 per cent due to the third wave but has retained full year GDP forecast at 9 per cent, with moderate downside risks, saying anyways Icra's forecast was the lowest among the consensus numbers which vary from 8.5-10 per cent, with the RBI pegging it at 9.5 per cent.

These economists also think the rupee will be under increased pressure this year given the fluid situation that the global economy is in and the US Fed's already announced tapering.

While Gupta-Jain sees the rupee at 74-78 to the dollar, Barua sees it at 74-76 this year.

The evolving pandemic situation and the US Fed move to raise rates this year will leave the rupee vulnerable and it may trade in the 74-78 range in 2022, Gupta-Jain said.

Tightening global financial conditions amid the Fed's tapering and the resultant 100 basis points rise in the US 10-year real yields in 2022, is set to make the road more bumpy for the rupee, which will continue to face depreciation pressure against the dollar as the current account deficit widens and the equity flow outlook dims.

“We expect the rupee to trade in the 74-78 range against the dollar this year.

"That said, unlike 2013 and 2018, we believe India is managing external vulnerability risks reasonably well and we do not foresee massive sell-off pressure,” Gupta-Jain said in a note on Wednesday.

Barua also said the Omicron threat will have the rupee staying range bound between 74-76 to the greenback, but hopes the RBI to intervene to support the unit.

Photograph: PTI Photo