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economy | IST

RBI points to gradual normalization; experts discuss fineprint

The Reserve Bank of India (RBI) expectedly kept interest rates unchanged at a record low on Friday but signalled the start of tapering pandemic-era stimulus measures on economic recovery taking roots.
The six-member Monetary Policy Committee (MPC) kept the key lending rate or the repo rate unchanged at 4 percent while the reverse repo rate or the borrowing rate was maintained at 3.35 percent. It voted 5-1 to retain the accommodative stance, RBI governor Shaktikanta Das said in an online broadcast.
Governor indicated the central bank's willingness to make "gradual" adjustments to the excess liquidity in the monetary system which currently stands at over Rs 9 lakh crore. Importantly, the G-SAP programme to purchase government securities from the market has been stopped for now to ensure that there is no further infusion of liquidity, he said and stressed that the step is not a reversal of its accommodative policy stance. RBI will be ready to resume bond purchases if needed, he added.
RBI projected substantial softening in retail inflation in the near term on the back of easing food prices and favourable base effect. The Consumer Price Index (CPI)-based inflation is now projected to be at 5.3 percent for 2021-22 with risks evenly balanced. In its August policy, the central bank had estimated inflation to be at 5.7 percent due to supply side constraints, high crude oil and raw materials cost.
Observing that there is liquidity overhand of Rs 13 lakh crore in the system, RBI governor Shaktikanta Das said on Friday that the exceptional measures undertaken during the pandemic will be dealt with in sync with macroeconomic developments to preserve financial stability. Since the onset of the pandemic, the RBI has maintained ample surplus liquidity to support a speedy and durable economic recovery, he said while announcing the outcome of the MPC meeting.
CNBC-TV18's Latha Venkatesh spoke to Samiran Chakraborty, chief economist at Citi; Pranjul Bhandari, chief India economist of HSBC, B Prasanna, head-global markets group of ICICI Bank and Ashwini Kumar Tewari, MD, international banking of SBI to decode RBI’s MPC policy.
On reverse repo, Chakraborty said, "We had two primary reasons for calling for a reverse repo hike. One was somewhat of a technical nature. The corridor was too wide and the way the cut offs for these VRRR auctions were there, we were expecting a lot of volatility in the cutoff. In fact, today's cutoff itself has come at 399 vis-à-vis 361 so we thought that just compressing this cutoff, this corridor would mean that one of the desired objectives of monetary policy which is fixing the short end that could be achieved."
"The more fundamental reason was our perspective that the emergency condition in the economy is over. So some of the emergency measures like widening of the corridor can now be rolled back. The way the RBI has interpreted, the MPC has interpreted the macro conditions, it appears that they still think that the economy needs a lot of policy support and growth is uneven, it has not yet returned back to its pre-COVID level. So their assessment of the macro situation appears to be a slightly different from our assessment of the emergency versus the cyclical part of the recovery and that is why probably the MPC decided to stay put on the reverse repo side while taking some action on the liquidity front."
On inflation, Bhandari said, "I do worry about inflation, core inflation has been higher than 5 percent for 18 months, and small companies haven't yet passed on input price increases. So there is some increase left to come I worry about that. But having said that, I think it was very clear to me in the policy meeting today that the RBI is setting the stage for normalization from the next policy meeting onwards, and they wanted to do it today without rocking the boat. So I actually feel good about this policy."
Prasanna said, "The most important news of the day was actually not anything that came out of the policy, but the VRRR cutoff, which came half an hour after the policy. So to answer that question, I will just qoute what Dr Patra said, when asked about liquidity management, he said, we are moving from active to passive management of liquidity. So I think they are really moving from active management of rates to passive management of rates. They are going to let the market decide the rate at which they will give money to RBI and hence decide on the VRRR cutoff accordingly.”
Tewari said, "We have been talking about the mispricing of risk for some time now and many of the banks have quoted much finer rates to corporates and these are mind you largely re-pricing of the loans under refinancing, they are not really fresh loans which are being given. So to some extent, this will get corrected, even at the shorter end and that I think is a good beginning. Because clearly the messaging from the RBI is remote versus the shorter end. However, when that starts to move up, the rest of the tenors also start to move up gradually. So we do hope that this would set in some correction in the pricing, which was not helping anybody, and it is actually not good for the system."
For full interview, watch accompanying video...