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Reserve Bank of India Repo Rate Forecast Report

The RBI is expected to hold the interest rate at the 5-7 April meeting, according to 91% of economists.

Meet our panel

Achala Jethmalani, Economist and AVP, Mirae Asset Capital MarketsRumki Majumdar, Associate Director, Deloitte IndiaShashank Mendiratta, Economist, IBM
Debashis Acharya, University of Hyderabad School of Economics, ProfessorAditi Nayar, Principal Economist, ICRA LimitedShumita Deveshwar, Director India Research, TS Lombard
Rajni Thakur, Chief Economist, RBL BankSudarshan Bhattacharjee, EconomistDebopam Chaudhuri, Chief Economist, Piramal Enterprises
Devendra Kumar Pant, Chief Economist, India Ratings & ResearchAmol Agrawal, Assistant Professor, Ahmedabad University

Key findings

  • 91% of panellists (10/11) expect the Reserve Bank of India (RBI) to hold the repo rate at the 5-7 April meeting
  • Nearly two-thirds of panellists say the rate will first increase in the first half of 2022
  • Unemployment is expected to drop to 6.1% by July 2021
  • Over a third of panellists believe remittances to India won’t bounce back until 2023

The April meeting

The Reserve Bank of India’s Monetary Policy Committee (MPC) is expected to hold the repo rate at the 5-7 April meeting, according to 91% of panellists on Finder’s RBI repo rate forecast report.

The general consensus of the panel is that the RBI will likely hold the rate while inflation is in the upper end of the target range.

Deloitte India associate director Rumki Majumdar put it this way:

“The inflation expectations are high and will influence prices in the months to come as the economy revives. It is expected to be in the upper end of the RBI target range, which will limit the RBI to reduce policy rates. On the other hand, tightening too soon may result in financial instability.”

IBM economist Shashank Mendiratta agreed sticky core inflation has diminished space for further rate cuts, adding that the normalisation of economic activity combined with higher crude oil prices is further reducing the Bank’s capacity to cut the rate.

“Having said that, the central bank will continue to remain in an accommodative stance as inflation will still likely average within the RBI’s range in FY22,” he added.

Rather than cutting the rate, TS Lombard Director India research Shumita Deveshwar says the Bank will instead focus on managing liquidity.

Mirae Asset Capital Markets economist Achala Jethmalani says the growth-inflation dynamics as well as risks to growth-inflation have rapidly changed from the time the MPC last met in February.

“Besides, the knock-on effect of the second wave on growth and commodity price pressures on inflation would turn the MPC members’ vigil and thus, maintain a status-quo on policy rates,” she added.

RBL Bank chief economist Rajni Thakur agrees conditions are still too uncertain to change the status quo.

“Macro dynamics remain uncertain still on many fronts – second wave, recovery, inflation etc. It will be prudent to wait while continuing to support growth,” she said.

However, one panellist, Piramal Enterprises’ chief economist Debopam Chaudhuri, thinks the Bank will drop the interest rate by 25 basis points. Not only that but Chaudhuri thinks the Bank should take it a step further and cut the interest rate by 50 basis points.

“The RBI [will be] finding it tough to manage debt market expectations. Inflation has inched down marginally, but the concerns on growth are larger right now,” he commented.

The next rate movement

A rate cut might not be too far off, with nearly one in five panellists (18%) expecting the rate to increase by the end of the year and a further two-thirds of panellists (64%) saying the rate will increase in the first half of next year. However, around one in five say the rate won’t increase until 2023.

Rajni Thakur expects the rate to increase in the second half of this year.

“Base remains of recovery trend intact and economy getting on high growth track, which along with pick up in inflation will necessitate hiking cycle but Central Bank will lean towards delaying this for as long as feasible,” she said.

ICRA Limited principal economist Aditi Nayar thinks the rate will increase in the first half of 2022.

“Growth needs to revive in a durable manner before rates are raised,” she explained.

Economist Sudarshan Bhattacharjee also says the rate will increase in the first half of 2022, noting that “real GDP should continue on a sustained growth path before RBI decides to increase rates.”

Achala Jethmalani thinks the rate will first increase in 2023.

“Even before the economic activity could fully normalise to the pre-pandemic levels, the second wave of the virus is already disrupting economic activity as variants of localised lockdowns are making a comeback.

“Thus, the path to economic recovery is expected to be bumpy and uneven, warranting a combination of growth-supportive monetary and fiscal policies. While growth would suffer due to demand constraints, the supply side and cost-push factors would exert upward pressure on inflation.

“The reflation in commodity, especially oil, prices is expected to keep inflation on the higher side; toughening the task for the MPC members,” she said.

Regardless of when it happens, the vast majority of panellists (82%) think the next rate movement will be up. Just two panellists, Debopam Chaudhuri and India Ratings & Research chief economist Devendra Kumar Pant, think the rate will drop again before it goes up.

Industry and employment

The unemployment rate declined to 6.5% in January 2021, and on average, the panel expects unemployment to drop even further to 6.1% by 1 July.

When asked which industries the panel expects to see an increase or decrease in employment over the next 12 months, overwhelmingly, the panel thought industries like healthcare and pharmaceuticals would see an increase in employment.

Informational technology, banking and financial services, and mining and construction also surfaced as industries set to see increased employment, with between 75-88% of panellists saying there’ll be more jobs available in these sectors.

At the other end of the spectrum, industries where employment is set to fall include sectors such as hospitality and tourism, with 38% and 25% of panellists projecting that employment will fall for these industries, respectively.

Achala Jethmalani says the knock-on effect of the second wave is likely to have a greater impact on mobility, contact-based services, recreational activity and tourism.

“Apart from restricted movement, the return of localised lockdowns, could yet again curb spending and at the same time also lead to an increase in precautionary savings.

“Hence, some of the sectors like hospitality, tourism and retail are likely to see relatively higher unemployment rates. Due to policy intervention by the government, we could see an improved employment scenario in sectors such as manufacturing, pharmaceutical, mining and construction.”

University of Hyderabad School of Economics professor Debashis Acharya says the COVID hangover will not go off so easily and induce people to travel.

“…tourism and hospitality will take more time to recover and employ more. Incremental increase[s] in other sectors are possible.”

Meanwhile, industries like defence and foreign trade and investment aren’t expected to see much change in either direction, with the majority of panellists (63%) saying they don’t expect to see employment either increase or decrease.

Rajni Thakur noted the services sector has yet to catch up to pre-COVID-19 levels.

“Manufacturing employment, on the other hand, has been running hot on mostly contractual labour and will likely get back to long term trend over next few months,” they added.

India remittance levels will take two years to bounce back

Historically, India is one of the biggest recipients of remittance inflows, which are vital to India’s economic development. In 2020, remittances to India fell by 9% and over a third (37%) of Finder’s panel say remittances won’t return to pre-COVID levels until 2023.

On the other hand, a little under a fifth (18%) say the number of remittances will bounce back as soon as the second half of this year. Over a quarter (27%) believe it won’t happen until the first half of 2022 and under a fifth (18%) predict it’ll be in the second half of the same year.

Half of the panellists say that this drop in remittances has impacted India’s ability to recover from the COVID-19 pandemic.

Rumki Majumdar believes the drop has impacted the country negatively as several states rely on remittances for their income.

Ahmedabad University assistant professor Amol Agrawal agrees with Majumdar, saying:

“India is the largest recipient of remittances. Several families depend on the remittances for running their homes. A decline in remittances must have impacted these families and impacted their ability to recover from pandemic shock.”

The cryptocurrency ban

The Indian government has signalled a potential ban on cryptocurrency in India but Finance Minister Nirmala Sitharaman recently clarified that the ban wouldn’t be as extensive as previously thought.

Debopam Chaudhuri believes the government is taking this approach because “conservative underlinings bode well for the economy.” Devendra Kumar Pant says the government is doing this to safeguard investors.

Of the six panellists who gave their forecasts regarding the ban, 66.67% remain uncertain whether the government will eventually ban crypto in the country. However, things are more divided when asked if they believe the government should ban crypto.

A third of the panellists are still uncertain, but an equal amount voted yes, the government should ban crypto and another third voted no, it shouldn’t be banned.

Debashis Acharya remains uncertain about what should be done regarding the crypto ban despite believing it may present a moderate level of risk to the Indian economy. He says it’s a matter of waiting to see what would be the best course of action.

“The trade-off between possible disorder in the market given the speculative nature of cryptocurrency and benefits of the technology underlying cryptocurrency calls for a wait and watch policy by the government,” he said.

Amol Agrawal thinks the government will eventually ban crypto but says the digital currency only presents a small risk to the economy and that the government should do otherwise.

“Cryptocurrencies come with some advantages of bringing different kinds of technology which could be used for digital payments,” Agrawal said.

Of the four panellists who commented on the potential risks that the Indian economy faces if crypto remains available, the surge of money laundering and terror was the most common response (75%) followed by macroeconomics becoming harder for the RBI to manage (50%).

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