The central bank will announce the fourth bi-monthly monetary policy Reviewed on Friday after inflation remained above its target for two consecutive months.
since cutting repo rate Amid the first wave of the pandemic, up 40 bps to 4 per cent and reverse repo to 3.35 per cent on May 22, 2020, the central bank has since left policy rates unchanged in the last eight reviews.
In a note, Barua said the RBI is expected to maintain its accommodative stance without any increase in the reverse repo rate, the currently effective policy rate.
However, he observes that the RBI is reducing the quantum of bond buybacks under the GSAP program in the third quarter, with a provision to revise it upwards if required.
Baruah cited several reasons for calling for the status quo, such as rising global risks, particularly from China, the Fed tapers and fears of not raising the US debt limit.
Global growth is likely to slow in the form of demand side manifestations along with supply side effects for industrial intermediates and fuels, he warned.
More worryingly, US bond yields have already risen sharply, with a knock-on effect on domestic yields.
Barua feels that while the US taper is underway, there could be an outflow of capital, which could impact domestic liquidity, which is high now.
Moreover, on the growth front, the domestic production gap still remains high and the capacity utilization in most industries is only less than 75 per cent. He added that domestic and SME balance sheets are still in bad shape and are best repaired under low interest/high liquidity conditions.
Thus, the balance of risk calls for action and continuation of the accommodative stance, Baruah said.
They also felt that the RBI would keep its GDP forecast at 9.5 per cent, reducing the inflation forecast from 5.3 per cent for the year to 5.9 per cent for Q2 and Q3 due to the fall in food prices.
He expects inflation to average 5.1 per cent in Q2 and 4.8 per cent in Q3 and 5.35 per cent for the full year till March.