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

The MPC was largely expected to keep the key repo rate unchanged. According to a recent Bloomberg poll, all 21 economists surveyed expected the MPC to leave the benchmark repurchase rate unchanged at 4 per cent, while the central bank was widely expected to announce another tranche of its so-called government securities acquisition program.

This marks the seventh time in a row that the RBI has maintained a status quo on policy rate. The central bank had last revised its policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting interest rates to a historic low.

In his speech, Das said that the economy is in a much better position as compared to June 2021 and added that the central bank will remain vigilant against the possibility of a third wave. He said that the MPC voted with a 5:1 majority to continue with an ‘accommodative’ stance as long as necessary to support growth.

Speaking on the retail inflation, the RBI governor said that the CPI inflation surprised on the upside in May and added that the price momentum however moderated.

Das said that the economic activity has evolved broadly along with the expectations of the MPC and monsoon revived after a brief pause.

He said that the outlook for aggregate demand is improving however the underlying conditions are still weak and added that more needs to be done to restore supply-demand balance in a number of sectors.

Speaking about the Gross Domestic Product (GDP) growth, Das said that the RBI’s projection for India’s real GDP is maintained at 9.5 per cent for the financial year 2021-22 (FY22). The RBI hiked the first quarter’s (Q1FY22) GDP growth to 21.4 per cent from its earlier estimate of 18.5 per cent. It further estimated real GDP forecast at 7.3 per cent in the second quarter (Q2FY22) vs 7.9 per cent estimated earlier, 6.3 per cent in the third quarter (Q3FY22) vs 7.2 per cent previously estimated and 6.1 per cent in the fourth quarter (Q4FY22) vs 6.6 per cent previously estimated. The real GDP growth for Q1:2022-23 is projected at 17.2 per cent.

Speaking on inflation, Das said that RBI has raised the FY22 CPI forecast to 5.7 per cent from 5.1 per cent estimated earlier. The RBI estimates CPI at 5.9 per cent in Q2, 5.3 per cent in Q3, 5.8 per cent in Q4 with risks broadly balanced. The CPI inflation for Q1 FY23 is projected at 5.1 per cent.

Explaining it further Das said that “Inflation may remain close to the upper tolerance band up to Q2:2021-22, but these pressures should ebb in Q3:2021-22 on account of kharif harvest arrivals and as supply side measures take effect. ”

The RBI governor said that a pre-emptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions.

Speaking about the Government Securities Acquisition Program, Das announced that the RBI will be conducting two more auctions of Rs 25,000 crore each on August 12 and August 26, 2021 under G-SAP 2.0.

“We will continue to undertake these auctions and other operations like open market operations (OMOs) and operation twist (OT), among others, and calibrate them in line with the evolving macroeconomic and financial conditions,” the RBI governor said.

Shaktikanta Das also extended the on-tap TLTRO scheme by three months till December 31, 2021.

Speaking about the MSF, Das said “To provide comfort to banks on their liquidity requirements, including meeting their Liquidity Coverage Ratio (LCR) requirement, this relaxation which is currently available till September 30, 2021 is being extended for a further period of three months, i.e., up to December 31, 2021.”

How economists and market experts reacted:

• Deepthi Mathew, Economist at Geojit Financial Services, said: “In an expected move, MPC kept the rates unchanged and continued with the accommodative stance. Though the MPC voted unanimously to keep the rates unchanged, votes for the continuance of accommodative stance were at 5:1. It shows that the inflation debate is getting more prominent. The forecast of inflation rate for FY22 was revised upwards to 5.7 per cent from 5.1 per cent announced earlier. RBI’s assurance to conduct OMOs when needed would help to keep the bond yields in check.”

• Unmesh Kulkarni, Managing Director Senior Advisor at Julius Baer India, said: “While the accommodative stance continues for now, the RBI’s higher inflation projection (compared to market expectations), along with the enhanced VRRR auctions, is likely to put some upward pressure on yields, especially at the short-end. The longer end (gilt) of the yield curve should largely remain range-bound for now, with active intervention by the RBI through a combination of OMO, Operations Twist and G-SAP. Overall, yields have already bottomed out some time back, and it will be interesting to watch RBI’s policy stance towards the end of this calendar year, with further stability in the domestic growth outlook, improvement on the vaccination front and developments around global commodity prices.”

• Bekxy Kuriakose, Head – Fixed Income at Principal Asset Management, said: “We think the possibility of further rate cuts is not ruled out but for that to happen CPI inflation needs to show meaningful downward trend closer to 4 per cent which may happen towards latter part of FY 2021. Meanwhile RBI will continue with other measures to aid credit flow to needy sectors and ensure monetary transmission. While a calendar or quantum of further OMOs was not mentioned we expect OMO purchases to continue while being episodic in nature. The disappointment of no rate cut may lead to a selloff of 5 to 10 bps in the near term. We advise investors to maintain a balanced asset allocation within debt funds with short term debt funds being the preferred category.”

• Nitin Shanbagh, Head – Investment Products at Motilal Oswal Private Wealth, said: “From investors point of view, focus should be towards investing in high quality roll down accrual strategies through a bar-bell approach viz. combination of short term and long term maturity strategies with weighted average portfolio average maturity of 4-5 years. For yield enhancement, investors can also consider investing upto 25 per cent in well researched REITs, InVits, select high yield MLDs, etc.”

• Kaushal Agarwal, Chairman at The Guardians Real Estate Advisory, said: “The RBI and especially the MPC are to be commended for maintaining an accommodative stance for the seventh consecutive time now. Their 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. The reduction in stamp duty charges in some parts of the country along with the all-time low housing loan rates have given the much-required fillip to sales activity in the last few quarters. 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.”

• Nish Bhatt, Founder & CEO at Millwood Kane International, said: “As expected the MPC voted to keep the key rates and the policy stance unchanged. The decision to extend the on-tap TLTRO scheme once again till December will maintain ample liquidity and support growth. RBI’s view of current high inflation being largely transitory in nature and its focus on growth is a big positive. The economy is showing signs of revival, it needs policy support. RBI’s estimate of inflation softening post-Q2 indicates that the current policy may continue for few quarters, with a beginning of normalization by end of FY22. The policy has been largely growth-oriented, supporting easy liquidity. It will help attain the high growth as estimated by the central bank – 9.5 per cent and 17.2 per cent for FY22 and FY23 respectively.”