The Monetary Policy Committee of the Reserve Bank of India (RBI) kept the repo rate unchanged at 4 percent for the sixth consecutive policy. It decided to maintain the accommodative stance amid uncertainty about the economic fallout of the second COVID-19 wave and rising inflation. Join our experts as they discuss RBI's decision and its impact on economy.
Overall | Dhiraj Relli, MD & CEO, HDFC Securities: MPC whittled down macroeconomic growth numbers and upped its inflation projections, completely in line with market expectations. It gives added credibility to RBI’s ability to navigate the country during difficult times.
On Resolution Framework 2.0 | CS Shetty, Managing Director at State Bank of India: The enhancement in the restructuring limit Rs 50 crore is definitely a welcome step. The steps were taken by the government in terms of expanding the scope of ECLGS and also the support which is provided now by the RBI will provide great support to industries.
On GSAP 2.0 | Abheek Barua, Chief Economist, HDFC Bank: In today’s policy announcement, the RBI ticked all the right boxes in terms of its response to the second wave. The announcement of GSAP 2.0 for INR 1.2 lakh crore and the carve-out for SDLs bonds in the program is likely to help ease the pressure in the bond market, especially given the higher state borrowing pressure and increase in Centre borrowings this fiscal. The central bank’s measure to provide liquidity support for contact intensive sectors is likely to aid credit flow to these sectors. That said, a more equitable distribution of credit is likely to be contingent on whether the assessment of risks is in line with the markup over reverse repo provided by the RBI to banks. Therefore, some form of credit guarantees is perhaps required for de-risking the system.
On GDP numbers | Abheek Barua, Chief Economist at HDFC Bank: One was expecting a downward revision in gross domestic product (GDP) numbers and we got it. In terms of the spectrum of the forecast, it is possibly on the more optimistic side. From a macroeconomic perspective, it is pretty much in line with most expectations, possibly on the growth side a little optimistic. From a macro-management perspective, it is interesting because it is very clearly articulating a construct that it wants to follow in order to manage growth and inflation going forward, which is to have absolute control over yields, keep them at a particular level or perhaps at times in a range. And coupled with what seems like an indication towards fairly aggressive exchange rate management, keeping the exchange rates within a band. This is RBI’s underpinning macro model.
On inflation, G-SAP, repo rate | Amar Ambani, Senior President and Head of Research – Institutional Equities, Yes Securities: The CPI projection of an average of 5.1 percent for FY22 looks credible as higher oil and commodity prices are leading to elevated price pressure. Though healthy monsoon and higher crop output may somewhat contain food inflation. The announcement of another round of G-SAP and devolvement of various bond auctions clearly convey RBI’s stance on interest rates and government borrowing costs. On the repo rate, we have hit the floor, with further rate cut completely ruled out given the prevalence of negative real interest rates. With the space for the traditional monetary policy being constricted, we expect the RBI to continue to use its balance sheet to keep financial market conditions easy.
Overall | Taimur Baig, Managing Director and Chief Economist at DBS Group Research: RBI is giving very clear signals to the market as don’t worry about inflation, even if it is going a little bit high. They gave everything that the market wanted - expanding the bond market purchase programme, extending direct support to affected sectors and acknowledging growth risks to some extent and that is the most the RBI can do. You know and I know that the real action is not at the central bank end anymore, it is with vaccination and dealing with the pandemic.
Overall | Sandeep Bagla, CEO, TRUST Mutual Fund: The policy bodes well for financial assets as well as the real economy, growth and employment as RBI has again stated its resolve to maintain conducive conditions to support durable growth. The policy is pragmatic, at the same time progressive and preemptive in its approach.
Overall | Amandeep Chopra, Group President and Head of Fixed Income at UTI Mutual Fund: Overall it is pretty much what the market had expected. The yields will move up significantly from here, maybe 1-2 basis points (bps) sort of a correction is more than adequate.
On liquidity boost | Jimeet Modi, Founder & CEO Samco Group: The RBI has indeed given a helping hand, in whatever way possible to boost liquidity for MSMEs, the hardest hit space in this pandemic. Support to the contact intensive sectors is definitely a move in the right direction although the relief package could have been higher to hold the bottom of the pyramid from losing ground. Various other decisions in terms of opening the debt markets to FPIs and facilitating a Rs 1.2 lakh crore in Q2FY22 for G-SAP 2.0 will aid to safeguard our economy from contraction and keep markets buoyant.
Overall | Dr Niranjan Hiranandani, National President, NAREDCO: 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 an ‘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.
Overall | Bekxy Kuriakose, Head – Fixed Income, Principal Asset Management: Today’s Policy did not have any major big bang fireworks or announcements. Gilt yields are stable post policy announcement with the current ten-year benchmark gilt trading around 6 percent. Given RBI’s active and dynamic management of primary auctions, OMOs (Open Market Operations) any rise in gilt yields on inflationary and fiscal concerns may be tempered by RBI actions. In the near term, we expect money market yields to remain stable as well considering there is no announcement on higher tenor variable reverse repo auctions but the same can't be ruled out in future. SDL spreads should also remain supported with ten yr SDL spreads in the range of 75-80 bps.
On inflation | Aditya Narain of Edelweiss Securities: The fact that RBI continues to look through inflation, not put up too many red flags around it and the fact that it is generally very accommodative for an extended period of time, plays through very well. As I said, no news is good news and the markets are doing well enough as they are.
Overall | Prof Krupesh Thakkar, CFA, HoD – Financial Markets, ITM B-School: RBI has cleared its stance that the focus will turn now to equitable distribution of liquidity from the liquidity management. This is evident also as interest rates are eased across the spectrum and spreads have narrowed as they were linked to market benchmark rates. These proactive, pre-emptive and timely measures would continue to keep this transmission going forward.