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 Reuters poll, all 51 economists polled by them expected the MPC to hold rates as Asia’s third-largest economy grapples with various state lockdowns.

This is the sixth 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 rate to a historic low.

Addressing the media, Das said that the resilience of the agriculture sector, forecast of monsoon, and the gathering momentum of the global economy could act as tailwinds for the domestic economy as the second wave recedes.

Speaking about the economic growth, Das said that the MPC cut the economic growth forecast for the current financial year (FY22) to 9.5 per cent from the previous forecast of 10.5 per cent. The RBI reduced the first quarter (Q1FY22) GDP forecast to 18.5 per cent from its earlier estimate of 26.2 per cent. It further estimated GDP forecast at 7.9 per cent in the second quarter (Q2FY22), 7.2 per cent in the third quarter (Q3FY22) and 6.6 per cent in the fourth quarter (Q4FY22).

This was the first MPC meeting after the government data showed that the economy contracted 7.3 per cent in the previous financial year (FY21).

Speaking about inflation, the RBI governor said that the central bank projects retail inflation (CPI) at 5.1 per cent in FY22. The RBI estimates CPI at 5.2 per cent in Q1, 5.4 per cent in Q2, 4.7 per cent in Q3, 5.3 per cent in Q4.

Das also said that another operation under Government Securities Acquisition Program 1.0 (G-SAP 1.0) for Rs 40,000 crore purchase will be conducted by the RBI. Also, G-SAP 2.0 worth Rs 1.2 lakh crore will be taken in the second quarter (Q2) of FY22 to support the market. The governor said that he expects the market to react positively to the move.

Saying that the RBI is committed to preserving the financial stability, Das announced that the central bank will open a Rs 15,000 crore on-tap liquidity at repo rate for contact intensive sectors till March 2022. This he said will give lending to the hospitality, car and bus rental operators, restaurants, salons, and other high-contact services.

Shaktikanta Das said that the RBI’s foreign exchange reserve is in touching distance of the $600 billion mark. This gives the RBI great confidence to deal with challenges arising out of global spillovers, he added.

How economists and market experts reacted:

• Deepthi Mathew, Economist at Geojit Financial Services, said: “In an expected move, RBI maintained the status quo in policy rates. To support and revive the economy, RBI would continue with the accommodative stance as long as it is needed. The governor cautioned about the factors that could put upward pressure on inflation. The announcement of G-SAP 2.0 at Rs 1.2 lakh crore for Q2FY22 shows RBI’s commitment to keeping the bond yields in check. The inclusion of SDL on G-SAP would support state government borrowings from the market.”

• Madhavi Arora, Lead Economist at Emkay Global Financial Services, said: “The MPC expectedly stayed on hold and emphasised its commitment to keeping policy accommodative and maintaining ample liquidity as long as necessary. This more state-led guidance hinges on growth revival becoming durable. The 100 bps downgraded FY22 growth forecast to 9.5 per cent was accompanied with acknowledgment of rising uncertainty amidst Covid second wave and localized lockdowns, while inflation is seen at 5.1 per cent for FY22, broadly same as last policy. The bigger move was with regards to yield management as the RBI stressed on smooth liquidity management and orderly G-sec borrowings, with a more vocal and defined GSAP . Of the residual Rs 400 billion GSAP 1.0 , around Rs 100 billion will be allocated to SDLs, while the GSAP 2.0 amount will be higher at Rs 1.2 trillion for 2QFY21. This would further ensure lower sovereign risk premia ahead amid elevated borrowing calendar this year. On other liquidity and regulatory front, Resolution 2.0 expanded to wider range of borrowers : (1) on-tap liquidity of Rs 150 billion for 3 yrs at repo rate to provide loans to contact services and new liquidity worth Rs 160 billion to SIBDI for on-lending for MSMEs and increase in the restructuring eligibility limits for MSMEs. Overall, while we do not see any action on the policy rate front in the coming months, we are poised to see a more accountable and action oriented RBI ahead. We reckon even as yields may inch up gradually and orderly, the RBI will continue to strive fixing skewed yield and maintain its preference for curve flattening (with GSAPs and OMOs). We see net OMO + GSAP purchases to the tune of Rs 4.5-5 trillion in FY22.”

• Anuj Puri, Chairman at ANAROCK Property Consultants, said: Had it not been for the pandemic the RBI would have definitely taken a different stance for the benchmark rates today. Considering the rate at which inflation is rising presently in the country, the RBI would have sought to increase the key rates. However, since the economy is still under pressure due to the pandemic and inflation is rising due to supply-side issues coupled with overall consumption sluggishness, it has maintained the status quo on benchmark rates. This is the sixth time in a row that RBI has kept the benchmark rates unchanged, in clear response to the exigencies of the COVID-19 pandemic uncertainties. It is certainly positive for home loan borrowers as the floating retail loan rates (which are directly linked to external benchmark repo rates) has been at the lowest level of the last two decades. The continuation of this low interest rate regime works very well for all borrowers as the environment of high affordability is likely to continue for some more time.”

• Ram Raheja, Director at S Raheja Realty, said: “While repo rate will continue at 4.00 per cent and reverse repo rate at 3.35 per cent amid Covid-19 uncertainty, most banks have used this as the benchmark for their loans. A continuation of this low interest rate regime works well for borrowers. With no hike in repo rate, homebuyers can plan for a home loan in the near future while also getting enough time for their home buying process and still can get loans at prevailing low rates. At today’s time as we are seeing RBI and banks are now focusing on other essential sectors to bring all sectors back in green which will work well in reshaping the economy.”

• Shishir Baijal, Chairman & Managing Director at Knight Frank India, said: “We welcome the RBI’s move to maintain status quo on key policy interest rates. Although expected, the RBI has continued its growth supportive policy stance. Additional measures to enhance liquidity support to most vulnerable touch sensitive sectors and small businesses; and expanded credit exposure limit for resolution is a great move. As the nation attempts to recover from the second wave of pandemic, there is a dire need to provide monetary policy support – on account of both easy availability and lower cost of funds – to households and businesses alike. Besides the monetary policy intervention, as we come out of graded regional lockdowns and further resume economic activities, there is a greater need to provide adequate fiscal support to jump start consumption demand. Demand stimulant measure like credit subsidy or tax waivers even for a limited period can play a transformative role until we reach the pre COVID-19 normalcy thresholds.”

• George Alexander Muthoot, Managing Director at Muthoot Finance, said: “RBI left the policy rates unchanged for sixth straight time and has avowed to continue accommodative stance as long as necessary to revive growth and help sustain it on a durable basis. This commitment by the central bank was supported by additional measures announced today such as a separate liquidity window of Rs. 15,000 crore for certain contact-intensive sectors and enhancing exposure threshold to Rs. 50 crore from Rs. 25 crore for MSMEs, small businesses and individuals for business loan purposes under Resolution Framework 2.0. Such steps will help borrowers to better mitigate the impact of pandemic’s second wave and we stand resolutely with every Indian to support all finance needs for a truly Atmanirbhar Bharat.”

• Niranjan Hiranandani, National President at NAREDCO said, “With the second wave impacting the economy in terms of a slowdown as also the rise in inflation, as expected, the RBI has maintained a status quo on the policy rates, as also continued the ‘accommodative’ stance. The downward revision in FY22 GDP growth projection (9.5 per cent) was also on expected lines. It is the sixth time consequently that RBI has kept the benchmark rates unchanged. While it reflects a response to the COVID-19 pandemic challenges, it is ‘advantage home loan borrower’, with the floating retail loan rates continuing to be at the lowest level over the past two decades. The low interest rate regime reflects ‘advantage borrowers’ and this is likely to continue for some more time. The RBI has pursued the broad intent of dealing with weak spots in the economy by providing on tap liquidity, with additional lending to distressed sectors.”

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