The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) kept the repo rate unchanged in the fourth bi-monthly policy meet for the financial year 2021-22, Governor Shaktikanta Das said, on Friday. The MPC voted unanimously to keep policy rates unchanged while it voted 5:1 to maintain an 'accommodative' stance. With no change this time as well, the repo rate currently stands at 4 percent. The reverse repo rate has been maintained at 3.35 percent.
To discuss the policy in-depth, CNBC-TV18 spoke with experts and economists, Aditya Narain, head - research, institutional equities of Edelweiss Securities, Taimur Baig, MD and chief economist of DBS Group Research, Anand Bagri, head - domestic markets of RBL Bank, Ashwani Bhatia, MD, SBI, Bhaskar Panda, executive VP and head- overseas treasury of HDFC Bank, Rajiv Anand, executive director of Axis Bank, and Ananth Narayan, professor, SPJIMR.
First up, Baig said, “The policy was a neutral hold. While I was expecting a bit of a hawkish hold, bit of a timeline with respect to more concrete ways of withdrawing liquidity, also maybe some discussion on capital inflow management which seems to be the big issue going forward for emerging markets in general, India in particular, which has been the beneficiary of a very large amount of inflows and how the central bank sees that in an environment where growth has bottomed, inflation may not be as scary as it seemed a little while ago, but we also have an issue of incomplete pass-through in India and that needs to be sort of taken into account as well.”
“Since those issues were not at the front and centre of the governor’s speech, I would interpret that as a neutral hold as opposed to laying the foundation for substantial withdrawal of liquidity, the variable rate reverse repo (VRRR) was widely expected, I don’t think that necessarily adds to any sort of a hawkish tone, so very neutral. I was expecting some discussion on the capital flow management side but found that missing,” said Baig.
Bhatia is of the view that by and large it was an accommodative policy
and there was no hawkishness. According to him, rates have bottomed out but the good part about the policy is that it is extremely balanced with no surprises. Also, the fact that they have announced the calendar gives you some path about what they are thinking for the next two-three months, he mentioned.
“I love the fact that the governor talked about the boat just coming to the shore but there is a journey beyond the shore also. I would be very positive as far as this policy is concerned, no surprises, inflation under control, wonderful measures and he is still giving growth a chance,” said Bhatia.
When asked if there was any hint on the reverse repo, Bhaskar Panda said, “I don't see any hint for the reverse repo. But at the same time, I have to congratulate the governor for giving a most balanced and growth-oriented policy and keeping all the policy rates as it is. We were expecting some change in probably reverse repo rate, but he has not changed it. The most important point is that the inflation expectations, which they are showing much lower, I personally believe it would be a little higher because of global oil prices remaining so firm. So that is a positive thing from the RBI perspective, but I will keep my fingers crossed.”
Meanwhile Narayan said that RBI has stuck to the tone promised and they have always talked about having a glide path, staying calm, doing things in a calibrated fashion.
“Unfortunately, in the last 10 days with all the chaos that we saw in energy and global markets and in US treasuries, etc., we did expect that there would be more hawkishness, but they stayed calm and looked through what happened in the last 10 days. I am actually pretty happy that they have stuck to that. If they had reacted now with an increase in VRRR or rather an increase in the reverse repo rate, etc., it would have been a sign of mild panic, which is not required at this point in time,” he explained.
“At the same time, they have taken steps so the expected increase in VRRR, that the governor mentioned was that you will see surplus liquidity of 2 to 3 trillion, which is lower than what you see right now, 4-4.50 trillion is a small glide down. Remember, in the December policy, we would have had the November FOMC as well, where the likelihood of a taper being announced is pretty high. So, at that point of time, in December, and in February, the chances of a reverse repo rate hike being introduced slowly is very much on the cards and it falls in with the glide path angle that they mentioned,” said Narayan.
Narayan is of the belief that the RBI is reducing quantitative easing (QE) before hiking rates. “Lastly, they have not been entirely dovish so the fact that they have not said anything on G-SAP, and zero G-SAP is a clear indication that, the fulsome support which was afforded in the first and second quarters might not be there. He has said he will do operation twist and OMOs as required, and even bring back G-SAP as required, but not having a headline number is a part of the normalization process, which is welcome,” he mentioned.
“Overall, it is a great policy, there was a lot of clamour to bring up short-term rates but they resisted doing that at this point in time, there is no credit offtake, we can wait for credit offtake to come before you raise short term rates. At the same time, the longer end is being held down by too much QE. Effectively they have reduced QE, they are going exactly the way the global central banks are going, reducing QE first before raising short-term rates,” said Narayan.
Narayan expects a 20-bps hike in reverse repo in the December policy.
Meanwhile, Anand felt that the governor was a bit circumspect about growth. Inflation has come down on one side but the pause is probably driven by the fact that the RBI is a bit circumspect about growth.
“What we are clearly seeing is the classic tapering -- first look at liquidity, and then look at rates and that's what is playing out at this point in time. So, you are going to see short-end rates going up because the governor has clearly articulated that VRRR is going to push the short end rates up, so may not do a reverse repo hike, but it is going to happen through the VRRR process. The first lot of CP issuances that we are going to see in the next few days will probably show you how much of an impact that is going to have as we go forward,” Anand mentioned.
“I think rates have bottomed out. The first step is normalization of liquidity. The second is to reprice that liquidity through a hike in reverse repo rate, that is narrow the corridor and let us see how the world looks as we get into the next fiscal and we could see one, maybe two rate hikes on the repo side in 2020-23,” said Anand.
Bagri also agreed with the consensus and said that the policy was on expected lines. “The RBI has done a very good job in preparing the markets for the eventual normalization of the policy that would happen. So, the liquidity as we move towards the December policy, the call fixing, the overnight rates would move closer to 375- 380 levels which are hovering around 350-360 levels now. So, we are expecting maybe 15-basis point reverse repo hike in the December policy,” he added.
For the entire policy discussion, watch the accompanying video