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Reserve Bank of India Repo Rate Forecast Report February 2021

The RBI is expected to hold the interest rate at the 3–5 February meeting, according to 17 economists.

Meet our panel

Rahul Sharma, market strategist, Equity99Sudarshan Bhattacharjee, economistRajni Thakur, chief economist, RBL Bank
Rucha Ranadive, economist, CARE Ratings Ltd.Sharad Kumar, national lead of economic research, Bajaj Finance LtdUdit Kumar, senior economist, Aditya Birla Group
Gauri Sharma, economist, Roha Asset ManagersPrithviraj Srinivas, chief economist, Axis CapitalNikhil Gupta, senior vice president, Motilal Oswal
Radhika Rao, economist, DBSAchala Jethmalani, economist, Mirae Asset Capital MarketsAditi Nayar, principal economist, ICRA Limited
Ankita Pathak, lead economist, Edelweiss WealthDevendra Kumar Pant, chief economist, India Ratings & ResearchRadhika Piplani, economist, YES Bank
Anuj Puri, chairman, ANAROCK Property ConsultantsMridul Mehndiratta, assistant professor, IFIM College, Bengaluru; founder, The Wealth DialoguesAmol Agrawal, assistant professor, Ahmedabad University

Key findings

  • 94% of panellists (17/18) expect the Reserve Bank of India (RBI) to hold the repo rate at the 3–5 February meeting
  • More than three-quarters of panellists say India is on a faster growth trajectory than expected
  • 41% of economists believe RBI should have dual targets for inflation and growth
  • Property prices in 10 of India’s biggest cities to decline by 3% on average over the next 6 months

The February meeting

An overwhelming 94% of panelists think the RBI’s Monetary Policy Committee will and should hold the repo rate at the February meeting.

National lead of economic research at Bajaj Finance Sharad Kumar believes the best caution is to stay the course until more is known.

“In the current situation where the numbers are yet to firm up and give some steady indication, it is prudent to maintain the status quo on rates. I would consider inflation as sticky with core inflation yet to show signs of moderation. Liquidity continues to be high with credit growth almost stuck around 5.5–6%,” Kumar said.

RBL Bank chief economist Rajni Thakur holds a similar view, suggesting the bank should wait for more clarity on growth and inflation trends post-coronavirus before opting for any rate action.

Nikhil Gupta, senior vice president at Motilal Oswal also believes that holding the rate is the right move, since the economic situation is looking more positive than in previous months: “Economic activity has picked up better than anticipated, and thus, holding the rates should be just fine.”

Several economists who said the bank will and should hold the rate, including CARE Ratings Ltd economist Rucha Ranadive, noted that while retail inflation has dropped, core inflation remains high and think the RBI will be keeping a close eye.

“Although retail inflation has declined to a 15-month low in December falling within the inflation target band of the RBI it’s mostly on account of high base effect and moderation in food inflation due to entry of fresh crops in the markets.

“The trajectory of inflation needs to be watched carefully as core inflation has remained elevated whereas the firming up of global commodity prices could exert an upward pressure on inflation. Upward revision in the economic growth for FY21 could be another factor,” Ranadive says.

Senior economist at Aditya Birla Group Udit Kumar notes that headline inflation is expected to be within the targeting band of 2–6% with food prices expected to ease further, weighing on headline prices.

“RBI would be observing closely the economic recovery and MPC’s decision is likely to be data dependent.”

Chairman at ANAROCK Property Consultants Anuj Puri says inflation is being gradually tamed but not nearly as much as is needed.

“Increasing the cost of borrowing can negatively impact the fledgeling roots of revival, and lowering them would not achieve much more than what is currently being achieved,” he said.

However, there was one dissenting voice, which came from Equity99 market strategist Rahul Sharma, who believes that the rate will and should be increased.

“It’s a better chance as everybody is so excited for the budget announcement and the government has also anticipated the announcements,” Sharma said.

Economic recovery

The majority (78%) of panellists think the Indian economy is recovering faster than previous expectations, in agreement with a recent report from the RBI.

Several economists including Mirae Asset Capital Markets economist Achala Jethmalani cite the declining number of COVID-19 cases as a factor in their forecast.

“Despite having seen the world’s most stringent lockdown, India has seen a quicker bounce back in its economic activity. The gradual opening up of the economy and no resurgence in COVID-19 cases have improved mobility that too around the festive season. This added momentum to demand; bringing about a faster than expected recovery,” she said.

Chief economist at India Ratings and Research Devendra Kumar Pant agrees recovery is faster than expected and says India is one of the only large economies which has not seen a second wave of COVID-19 infections.

“Stringent lockdown from end-March 2020 to end-May 2020 has brought down economy to almost a grinding halt, the expectations were that the slowdown will continue for a longer time. Since the contraction was too sharp in April–June 2020, as activities started and economy started opening up, the recovery has been faster than initial assessment,” he said.

However, over a fifth (22%) of the panellists remain neutral on whether or not they agree with the RBI that the economy is beating expectations. Roha Asset Managers economist Gauri Sharma says that many indicators show a positive upward trend, but they still lag behind pre-COVID-19 levels.

“For instance, there has been a y-o-y improvement in bank credit by 6.7%. However, the growth in credit for the same period last year was around 7.5%. Thus, the recovery is still lagging the pre-COVID-19 levels of activity.”

“There has also been a growth in total deposits of the banking system by 11.5%, this is against a growth of 9.8% for the same period last year. Thus, though the liquidity has prima facie increased, risk aversion also seems to have increased,” Sharma said.

IFIM College assistant professor Mridul Mehndiratta agrees that the economy is on the path towards recovery, but sustaining this recovery is a different challenge altogether.

“While the economy is indeed on a recovery path after hitting rock bottom, however converting this into a sustained growth trajectory can be a challenge given the headwinds from inflationary pressures, limited direct fiscal support and fragile financial sector,” Mehndiratta commented.

In terms of when the panel expects to see the economy recover, just under a third of panellists (29%) expect recovery by April this year and nearly half (47%) say recovery will happen on an even faster timeline.

ICRA Limited principal economist Aditi Nayar expects the economy to exit the recession in the current quarter and Bajaj Finance Ltd national lead of economic research Sharad Kumar says recovery is already underway.

“The recovery has already started and there are indication[s] for that. Statistically the lower base of Q1FY21 will play a role in turning Q1FY22 positive,” he said.

However, around a quarter of panelists (24%) think recovery will happen on a slower timeline.

Gauri Sharma expects economic recovery will happen by late 2021, noting the resilience of the Indian economy is yet to be tested.

“Though the Indian economy has shown a resilient performance, we still need to evaluate whether the recovery in demand will be long lasting. There are some sectors which are being impacted by the spread of the new strain in countries like the UK and though the vaccine is now out, uniform and equivocal distribution is critical.”

Assistant professor at Ahmedabad University Amol Agrawal thinks the economy will exit recession by mid-2021.

“Economic data is still very uncertain. Some indicators indicate a faster recovery and others indicate the opposite. The IIP and core sector data has contracted again in last two months,” he said.

One economist, Rahul Sharma, says the economy won’t recover until mid-2022. He says that the “condition of the economy is so stressed, that at least it needs 15–18 months to recover”.

Overall, 27.78% of the panel say the economic recovery will be V-shaped (a steep decline followed by quick recovery), 16.67% say it will be U-shaped (a period between decline and recovery) or W-shaped (recovery, followed by a second decline). Just 11.11% expect a Z-shaped (a downturn followed by a bounce back to pre-crisis growth).

Just over a quarter of panellists (27.78%) including Rucha Ranadive, Aditi Nayar and DBS economist Radhika Rao, cited other shapes of economic recovery, such as a K and a Nike swoosh.

Changes to inflation targeting

In 2021, the RBI is expected to review its inflation targeting mechanism, with the plurality of our panel (41%) thinking that the RBI should have dual targets for inflation and growth. Over one-third (35%) of panellists think that the RBI should maintain the status quo saying they don’t think any changes should be made to the inflation targeting mechanism, with closer to a quarter of panellists believing that the RBI should look to policies designed to target core inflation.

Two panellists think that the RBI should have some flexibility going forward, with Jethmalani saying that the bank needs to adopt “flexibility to manoeuvre in the band rather than be fixated on a mid-point.”

Assistant professor at Ahmedabad University Amol Agrawal says that the original framework needs to be revisited. “The framework says RBI needs to write a letter to the government only when it misses [its] inflation target for three continuous quarters. This is too long a time and needs to be shortened.”

None of the panellists in our report recommend the RBI widen the inflation targeting band and the majority (94%) say that widening the inflation targeting band beyond 2–6% would dilute the effectiveness of monetary policy.

When asked as to what they believe to be an appropriate band for inflation targeting, over three-quarters (79%) said that the current targeting band of 2–6% is appropriate. Mridul Mehndiratta cautioned any further widening saying: “The band of 2–6% is already quite wide, it is the widest in Asia. Any further widening means the inflation targeting loses its focus and essence of ‘targeting’ in inflation targeting.”

As far as how India should be approaching inflation targeting, Ankita Pathak, the lead economist at Edelweiss Wealth said:

“Inflation targeting should move beyond CPI and look more towards WPI (that contributes two-thirds to the GDP deflator). Also, a dual mandate of growth and inflation targeting is ideal. Looking at inflation in isolation says a little.”

Property forecasts for 2021

Of the 18 panellists, 7 gave their predictions for the future of the property market. On average, they predict that property prices will decrease by -3% in the 10 biggest cities over the next 6 months. The cities of Jaipur, Chennai and Kolkata are expected to see the biggest decrease at an average of -8%, followed by Surat (-6%) and New Delhi (-3%).

Hyderabad and Bangalore are the only cities where panellists anticipate a price increase, but any upswing is projected to be slight at just 1% increase in each city.

73% of the panel believe that more first home buyers will enter the market this year. On the other hand 7% say it’s unlikely, while 20% remain unsure.

Gauri Sharma says that while corporate real estate purchases might fall, domestic housing will grow.

“I am of the opinion that [a] house as an asset has gained a new importance for an individual. Though we may see reduced demand from the corporate sector for office space, I believe affordable housing space is going to grow even more,” she said.

Axis Capital chief economist Prithviraj Srinivas says buyers who were just sitting on the sidelines in the past years have most likely made the decision to finally buy a house once prices started to crack.

“Besides, housing also got a tailwind from non-residents who were forced to think of a home base in India and there is some bit of portfolio diversification for urban Indians invested heavily in equity markets as well.

“Expect [the] future of real estate to be driven by end users in [the] ultra affordable segment given that most jobs created in the last seven years have been urban self-employment jobs,” he said.

Image: Getty

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