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RBI policy not as hawkish as what market interpreted, says ICICI Bank's B Prasanna

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RBI policy not as hawkish as what market interpreted, says ICICI Bank's B Prasanna

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The RBI’s monetary policy committee on Friday maintained status quo on the key policy rates -- repo rate and reserve repo rate. While the stance remained "accommodative", the vote was not unanimous. The central bank has hiked its inflation forecast for this financial year from 5.1 percent earlier to 5.7 percent. This was slightly higher than the 5.5 percent forecast that most investors were expecting. The market has responded by pushing bond yields slightly higher.

The RBI’s monetary policy committee on Friday maintained status quo on the key policy rates -- repo rate and reserve repo rate. While the stance remained "accommodative", the vote was not unanimous.
One MPC member, Jayanth Varma, voted against it while five others voted for it.
The central bank has hiked its inflation forecast for this financial year from 5.1 percent earlier to 5.7 percent. This was slightly higher than the 5.5 percent forecast that most investors were expecting. The market has responded by pushing bond yields slightly higher.
The RBI maintained its GDP growth forecast for the year at 9.5 percent. Governor Shaktikanta Das said growth is improving but the recovery is still weak and overcast due to the pandemic.
B Prasanna, Head of Global Markets at ICICI Bank, said, “I would take it as a marginally less dovish policy and not exactly a hawkish policy. The reason the market took it little on the hawkish side is because of three things – first was the fact that there was a dissent on the accommodative nature of the policy itself. Second was because of the inflation estimate having been revised much higher than the market consensus.”
“Market was veering around 5.3-5.5 percent but RBI has taken it even higher. Third was the fact that RBI has laid out a plan for taking out liquidity through use of variable reverse repo rate (VRRR) over the next couple of months. My personal view is that it is possibly not as hawkish as what the market today has interpreted it.”
While giving his take on RBI policy, Ashwini Kumar Tewari, MD of International Banking at SBI, said, “Governor very clearly said that the accommodative stance will continue as long as necessary and the growth has to be supported at all costs. So, what we are seeing, in fact, is quite the opposite in our corporate finance limited deals, whatever are happening, the interest rates so far it is downwards. Therefore, the kind of fine pricing we are seeing at the moment in the market I don't see anyway that the interest rate movement is reversing at the moment. So that is where we are actually and the borrowers are having the best of the time.”
On home loans, Tewari said, “So the home loan rates, I think are kind of bottomed out. We keep having promotions on processing fees, etc. So I don't see the rates going down further in the home loan space. In any case it is a product where the margins are very, very low to begin with. So therefore, I don't see rates coming down from 6.7. The processing fee, of course, we have waived it at the moment as you know.”
On inflation, Pranjul Bhandari, Chief India Economist at HSBC, said, “Inflation has been higher than 4 percent for 21 months in a row and you know, half the times out of this 21 months, it was even higher than 6 percent. At some point, if the market start assuming that the RBI is comfortable with inflation at 6 percent, then all the benefits of having the inflation target at 4 percent will be lost. So, that is something you know, the RBI has to be very clear about.”
She added, “The other thing it has to be very clear about is that look, it is focusing on growth, but what does it want to achieve from growth. Monetary policy is strictly counter cyclical, it can help close the output gap, but it can't be used to increase potential growth. When you have an RBI, which keeps talking about the investment cycle and overtime rising, you sort of start thinking that what is the RBI focusing on? Is it focusing on closing the output gap or is it focusing on long term drivers of growth? It should be very clear here, that it's its focus eventually is its inflation target. So, yes, I think, you know, if it continues this way, there could be some sense of falling behind the curve.”
“I don't think we are there yet now. But my sense is that if you don't have a disruptive third wave, if vaccination continues, then by the fourth quarter of this year, the RBI should definitely get on to a gradual tightening path.”
For full interview, watch accompanying video...
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