RBI’s Monetary Policy Committee meeting to consider Omicron’s impact on key rates

All eyes are on RBI’s Monetary Policy Committee meeting which is likely to keep all the key rates unchanged, primarily on threats of Omnicron strain of Covid-19. They will wait and watch for further data to make any move on rate action. It is likely they will continue to balance between economic growth and inflation and use other tools at their disposal to manage liquidity. It will be important to see the tone and narrative of the policy but action will likely move to the next calendar year.

A revival in the consumption cycle after Covid 2.0, led by latent demand and surplus liquidity in the system, fuelled growth in the economy back to pre-pandemic levels in the July-September quarter. Higher crude prices, supply chain issues and agri produce prices resulted in higher inflation and core inflation remained sticky.

The central bank had started liquidity normalisation that saw the yield curve rising. It was widely expected there would be some policy measure on moving the reverse repo rate in the December policy.

However, the new Omicron variant has caught everyone unawares and the scare of the new variant looms large. We are as yet unclear about Omicron’s intensity, but it definitely could push back the return to normalcy if its spread intensifies in the next few weeks.

RBI’s accommodative stance and liquidity push ensured that the long pent-up demand made itself felt in the festive season that began from October. That is how the economy bounced back in the September quarter and in October, did marginally better than the pre-pandemic era.

It was widely expected that the RBI would now start unwinding some of the liquidity. The capital expenditure cycle has started in pockets and is expected to increase. Travel has seen an upsurge, entertainment, malls and restaurants have gradually opened up and consumption demand has been steady. But Omicron has stoked some amount of uncertainty in the system. There is likely to be a slowdown in travel and some discretionary consumption. The next two-three weeks are critical to understand the intensity and likely impact of Omicron. This could have some impact on the growth trajectory if lockdowns or other such restrictions are imposed.

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