The upcoming Monetary Policy Committee of the Reserve Bank of India is meeting on December 6-8, 2021 to decide on policy action. The monetary policy review along with the release of key macro economic data points will steer the key equity indices this week.
It is widely expected that RBI's MPC will maintain a status-quo in the key lending rates, according to news reports. At present, the MPC of the central bank has maintained the repo rate, or short-term lending rate, for commercial banks at 4 per cent.
Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company Limited said, "Yet again, the virus has mutated, and with it, the likely permutations for December 21 RBI policy. While we may infer from experience that each subsequent COVIDI variant has had an incrementally less severe impact on economic activity, there are no guarantees with COVID. Additionally, with inflation becoming a political issue, Global Central Banks are retiring their belief in the “transitory” nature of inflation."
In contrast, the near-term Indian CPI is likely to remain within the MPC target band of 4 to 6 percent. This, in turn, should give the MPC time to assess the medium term implications of Omicron by continuing to maintain an accommodative pause in Policy Rates in December, he said.
"We, however, expect RBI to continue normalizing high banking system liquidity by further adjusting quantum and tenor of existing VRRR operations. Interest rates markets have re-aligned to this new reality and expected to remain range bound around current levels in the absence of a policy surprise," said Bhatt.
Rajani Sinha, Chief Economist and National Director - Research, Knight Frank India said, "RBI has started the process of normalization by mopping out excess liquidity from the system through enhanced VRRR auction and suspending the G-SAP. There was growing expectations that in the December MPC meeting, RBI would hike the reverse repo rate to narrow the corridor between repo and reverse repo rate.
"However, the new COVID variant Omicron has again pushed the global and Indian economy in a state of uncertainty and nervousness. There is also added uncertainty of any knee-jerk reaction of Indian and global financial markets to Federal Reserve’s monetary policy indication/action. In such a scenario, RBI in its upcoming meeting is likely to keep the rates on hold. On the growth front, while most economic indicators have surpassed pre-COVID levels, there is still a lot of slack in the economy. Hence RBI may decide to wait and watch till the next MPC meeting in February 2022."
RBI will be concerned about inflationary pressure building in the economy. Currently, the upward pressure on inflation is because of high commodity prices and supply bottlenecks. However, with economic growth gathering momentum, there is threat of further demand side pressure on inflation. Sinha said, "We can expect RBI to start hiking rates from 2022. RBI will also narrow the corridor between repo and reverse repo rate, with sharper hike in reverse repo rate. The quantum of rate hike will be dependent on how the COVID scenario pans out and its subsequent impact on economic growth in 2022," she added.
"Investors on Monday (December 6) would react to the release of US non-farm payroll data over the weekend, while keeping an eye on RBI's policy decision due next week wherein status quo is likely to be maintained," said Siddhartha Khemka, Head, Retail Research, Broking & Distribution, Motilal Oswal Financial Services told IANS.
"We recommend investors to continue to buy on dips strategy, as the uncertainty is likely to continue for the time-being, while the long-term fundamentals remain intact," Khemka added.
Besides, the retail inflation gauge of Consumer Price Index (CPI) for November will be released next Friday. The Index of Industrial Production (IIP) for October will also be released.
"Major domestic data points awaiting their release in the coming week are November's inflation data, which is expected to remain elevated, and October's industrial and manufacturing production data," said Vinod Nair, Head of Research at Geojit Financial Services.
On technical levels, Deepak Jasani, Head of Retail Research, HDFC Securities, cited that weekly charts show a 'doji' like formation which suggests that the recent down-move may be close to an end for the time-being.
"We may see some consolidation or upward bounce for the next few sessions. On upmoves 17,536-17,613 could act as a resistance while 16,722-16,782 could act as a support on a weekly basis," Jasani said.
In addition, FIIs' behaviour will play a critical role in the direction of the market, said Santosh Meena, Head of Research at Swastika Investmart.
Last week, FIIs sold equities worth Rs 15,800 crore in the cash market.
"However, DIIs provided good support to the market by handsome buying worth Rs 16,500 crore in the cash market," Meena said.
(With additional inputs from IANS)
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