RBI Monetary Policy: Repo rate unchanged at 4%, accommodative stance as long as necessary

The Indian central bank was widely expected to keep key interest steady amid a surge in COVID-19 cases in the country. According to a recent Reuters poll, 65 of 66 economists surveyed said the MPC will leave rates unchanged.

Last week, the government had asked the RBI to maintain retail inflation at 4 per cent with a margin of 2 per cent on either side for another five-year period ending March 2026.

This is the fifth time in a row that the RBI has maintained a status quo on policy rate. Das said that the central bank will keep inflation at the targeted level and also added that the recent rise in COVID-19 cases has created uncertainty over economic growth recovery.

The RBI governor said that the focus must be on containing the spread of coronavirus and towards economic recovery. He added that the RBI will ensure ample liquidity in system so that productive sector gets adequate credit.

Speaking about the economic growth for the financial year 2021-22 (FY22), Das said that the MPC kept the GDP estimate for FY22 unchanged at 10.5 per cent. The first quarter (Q1FY22) GDP growth outlook is estimated at 26.2 per cent, 8.3 per cent in the second quarter (Q2FY22), 5.4 per cent in the third quarter (Q3FY22) and 6.2 per cent in the fourth quarter (Q4FY22).

Speaking about inflation, The Indian central bank chief said the MPC revised the consumer price index (CPI) inflation to 5 per cent during the last quarter of the financial year 2020-21 (Q4FY21) and forecast the CPI inflation at 5.2 per cent in the first half (Q1 and Q2) of FY22, 4.4 per cent in Q3 and 5.1 per cent in Q4.

He said that while the headline inflation at 5 per cent in February remains within the tolerance band, some underline constituents are testing the upper tolerance level. Going forward, the food inflation trajectory will critically depend on the temporal and special progress of the southwest monsoon in the 2021 season.

Das further added that there has been some respite from the incidence of domestic taxes on petroleum products through coordinated actions by the central and state governments could provide relief on top of the recent easing of the international crude prices. However, the combination of international commodity prices and logistics costs may push up input price pressures across manufacturing and services.

The RBI governor said he will continue to do whatever it takes to preserve stability and to insulate financial firms from global spillovers. The RBI also announced a Rs 50,000 crore additional liquidity facility to NABARD, NHB and SIDBI for fresh lending during FY22. The central bank also extended the TLTRO scheme by 6 months up to September 30, 2021.

The central bank announced a secondary market government securities (G-sec) acquisition plan worth Rs 1 lakh crore for the first quarter (Q1).

Speaking on payment banks, Das announced that payment banks can now allow individual customers to keep a balance of up to 2 lakh from a deposit limit of Rs 1 lakh earlier.

How economists and market experts reacted:

• Deepthi Mathew, Economist at Geojit Financial Services, said: “It was in the expected line as the MPC kept the rates unchanged. Though the governor assured of maintaining the accommodative stance as long as the economy recovers, he also cautioned about the factors that could push up prices. One of the highlights in today’s statement was the announcement of G-sec acquisition program 1.0, which the bond market needed the most. It could help in the cool off in bond yields and support the government’s market borrowing program”

• Kaushal Agarwal, Chairman at The Guardians Real Estate Advisory, said: “The RBI and especially the MPC needs to be commended for maintaining its accommodative stance for more than a year now. It’s approach, towards tackling the situation created by the pandemic and steps taken to help revive the economy, will go down in History as being one of the finest. Keeping in mind the resurgence of COVID infections across the country, a slight reduction in the key rates would have been widely celebrated. With the temporary reduction in transaction costs being withdrawn, in states like Maharashtra, the expectation amongst stakeholders of the industry is that the banks should now further sweeten the lending rates, at least till such time that the economy gets back to the pre-COVID levels.”

• Pritam Chivukula, Co-Founder & Director at Tridhaatu Realty and Hon. Secretary at CREDAI MCHI, said: “Given the surge in COVID19 cases and intermittent lockdowns across major cities, we thank the RBI for continuing with their accommodative stance. We further urge the RBI to take immediate action to arrest the deteriorating health of MSMEs caused due to the regular stop-start nature of business activities and increasing input costs which are having a catastrophic impact on the survival of these businesses.”

• Sandeep Bagla, CEO at TRUST Mutual Fund, said: “Interest rates are likely to remain range bound going forward as RBI is committed to ensure easy liquidity and low repo rates. The increase in Government borrowings are likely to be partially offset by RBI OMOs and secondary market purchases of Government securities. Inclusion of government securities global bond indices will add to the demand. Corporate bond spreads are likely to remain at moderate levels on back of restrained supply and continued demand from institutional investors. Unless inflation expectations start increasing in the future, fixed income investors will do well to remain invested in Indian bonds”

• Rajani Sinha, Chief Economist & National Director – Research at Knight Frank India, said: “The RBI has taken reassuring steps to infuse additional liquidity into the housing sector through the interventions of increased financing to National Housing Bank and extension of priority sector tag for bank funding to NBFCs for housing loans. However, given the inflationary concerns in recent months, RBI has maintained the status quo on key policy rates. At a time when rising second wave of COVID infections and subsequent lockdowns are derailing economic momentum, RBI interventions will help maintain adequate liquidity as well as prevent hardening of yields in bond market. These measures will ensure economic stability as well as keep real estate sector stay afloat during such precarious times. Hopefully, benign retail inflation on account of better monsoon and easing of crude oil prices, coupled with accommodative stance would translate into lowering of policy rate in near future.”

• Nish Bhatt, Founder & CEO, Millwood Kane International, said: “The status quo on key rates and the Accommodative policy stance by the MPC was on expected lines, it has been so for almost a year now to support the economic recovery. RBI’s intent to continue with easy monetary policy till growth picks up pace, GDP, and inflation trajectory despite COVID-related disruptions is a positive development. Though RBI’s view on inflation will have a bearing on the rupee performance in the near term. The economic activity is normalizing in spite of a surge in new cases till now but the second wave of COVID19, its impact on economic activities, rising inflation, and bond yields may pose a risk to growth going forward.”

• Abheek Barua, Chief Economist at HDFC Bank, said: “The RBI policy was more dovish than expected with the central bank recognising the risks associated with the rising infection cases in the county and continuing its support for growth through a number of measures including its commitment to keep liquidity in surplus and an extension of measures like the on-tap TLTRO. Fears of any pre-mature tightening either through rates or liquidity management by some sections of the market have been put to rest by RBI’s dovish tone today. The governor was for instance categorical that the changes in liquidity measures announced today does not constitute tightening. The focus of the policy was clearly on yield management and the announcement of the G-sec acquisition program (GSAP 1.0) is likely to stabilise and support long term yields. Although, the extension of tenures for the VRRR (variable rate reverse repo auctions) might lead to some hardening at the short-end of the curve. The upward revision of the inflation forecast by the RBI is justifiable given rising commodity prices, although we see further upside risks to the current forecast range. That said, inflation is unlikely to be an area of concern for the RBI for the coming months and growth is likely to remain the policy priority.”

• Amar Ambani, Senior President and Head of Research – Institutional Equities at YES Securities, said: “With Bond markets pricing in a status quo well in advance, MPC barely surprised in terms of accommodative stance. All the members of the MPC unanimously voted for no change in policy rates. The central bank reiterated its FY22 real GDP growth projection of +10.5%, while sees inflation trajectory to hover around 5% in H1 FY22. RBI vehemently articulated that that absorption of excess liquidity through reverse repo should not be construed as reversal of accommodative policy stance. RBI governor expressed the need for orderly evolution of yields and will initiate 1 trillion of OMOs during Q1 FY22 to combat extreme volatility. RBI’s liquidity support will certainly help in assuaging market apprehensions given that supply of G-Sec paper will remain elevated on the back of frontloading of market borrowing. For FY22 as a whole, OMO operations are expected to be above INR 3 trillion, similar to FY21 level. Possibility of inclusion of Indian G-secs in the global bond indices will also absorb the supply. Nevertheless, we expect 10year yields to inch higher, possibly trade in the range of 6.2-6.25% in the near term, as there are concerns over stubborn core inflation, resurgent COVID infections, renewed localized lockdowns and relatively higher sovereign yields in US. Additional measures announced that are positive for smaller HFCs, NBFCs and MFIs were on-tap TLTRO scheme extended by 6 months and additional liquidity support of 500 billion to AIFIs. Key beneficiaries of these measures could be Can Fin, Repco, Home First, Shriram City and MFIs like CREDAG and Spandana.”

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