The Reserve Bank of India's Monetary Policy Committee (MPC) has kept the repo rate and reverse repo rate steady for the seventh consecutive time in August 2021.
The Reserve Bank of India’s Monetary Policy Committee (MPC) has kept the repo rate and reverse repo rate steady for the seventh consecutive time in August 2021. The monetary policy decision of status quo on interest rates was unanimous by all the six MPC members. RBI Governor Shaktikanta Das announced to maintain the policy stance ‘accommodative’ for as long as necessary to support growth. The vote on continuing with the accommodative policy stance was 5:1. Das also added that CPI inflation surprised on the upside in May. Outlook for aggregate demand is improving but underlying conditions are still weak. More needs to be done to restore supply-demand balance in a number of sectors. The real GDP projection has been retained at 9.5 per cent for FY22, while CPI inflation estimate for FY22 has been revised to 5.7 per cent from 5.1 per cent. The central bank will also conduct two G-SAP auctions of Rs 25,000 crore each. RBI will also conduct four more VRRR of higher quantum in Aug-Sept. VRRR quantum will be hiked to Rs 4 lakh crore.
Growth outlook retained, but inflation expected to stay elevated for longer
Barclay’s India: Acknowledging the upside risks to inflation, RBI raised its CPI inflation projections materially and now expects retail inflation to average 5.7% on-year in FY 21-22 against its prior estimate of 5.2% on-year. The statement cited elevated international commodity prices and ongoing supply disruptions as key upside risks to inflation, but downplayed logistical difficulties as risk to inflation trajectory. The RBI expects CPI inflation to stay sticky, slowing to 5.3% by end-2021 and remaining above 5% over the forecast horizon. In our view, this suggests that once the growth recovery is sustainably underway, the bank’s hesitance to normalise monetary conditions may fade.
CARE Ratings: The monetary policy continues to be growth centric, despite the underlying upside risks to inflation. Diverging views on inflation could strengthen within the MPC members in coming policies and this could have implications on sustainability of the accommodative policy stance. That said, the accommodative policy stance is likely to prevail at-least in this calendar year. As such, we do not foresee a change in policy rates in 2021.
Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank: In line with expectations, the MPC maintained a status quo on rates and its accommodative stance. The focus continues very much to be on growth which they see as “nascent and hesitant recovery”. Although inflation is above the comfort zone with an upward revision in estimates, the MPC does view it as transitory. Going forward, we can expect easy liquidity conditions and rates to continue to support economic growth even as the central bank monitors key indicators on Covid, growth and inflation for future policy guidance and action.
Additional measures: On Tap TLTRO, LIBOR, MSF relaxation
Anjana Potti, Partner, J Sagar Associates: In keeping with the accommodative stance, the RBI has extended the TLTRO and marginal standing facility up to September 30, 2021 and December 31, 2021 respectively continuing to ease liquidity pressures on NBFCs and banks and boosts access to funds by the market. Considering the impact that the transition from LIBOR will have on the financial market, the RBI has decided to amend the guidelines related to export credit in foreign currency and restructuring of derivative contracts to permit the adoption of a widely accepted alternative reference rate in the relevant currency. As a consequence of such impending amendments the transition to an alternative reference rate will not be treated as a ‘restructuring’ under the ‘Prudential Norms for Off-balance Sheet Exposures of Banks – Restructuring of Derivative Contracts’.
Amar Ambani, Senior President and Head of Research – Institutional Equities, YES Securities: RBI’s intention is to keep liquidity conditions benign that is, in general, supportive for banking business activity and would also prevent losses on the investment book due to any undue rise in interest rates. Banks will be allowed to extend export credit based on any other widely accepted Alternative Reference Rate. Change from LIBOR to Alternative Reference Rate will not be treated as restructuring. These steps ensure a smooth transition for banks away from the LIBOR regime. Resolution framework / Restructuring 1.0 – Recognizing the adverse impact of the second Covid wave, the target date for meeting the sector-specific thresholds for the 4 specified operational parameters stands extended to 1st October 2022 i.e. by 6 months. It gives some more breathing space to banks in terms of successfully carrying out restructuring and reduces, ceteris paribus, chances of restructured wholesale accounts from slipping into NPA category.
Liquidity taps to stay open, but VRRR needs to be scaled-up
Barclays: The RBI announced the continuation of its GSAP bond purchase program and assured markets of continued liquidity support. However, in order to better manage liquidity in the financial system, the central bank announced that it will scale up its variable reverse repo rate auctions. The governor believes the market does not view this step as a reversal of accommodative policy, but a measure needed to ensure that liquidity can be better managed, adding that banks have avenues to park their excess liquidity with the RBI for a slightly longer tenor if needed.
Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company: A phased increase in the quantum of Variable Rate Reverse Repo operations to INR 4 trillion is one such measure that in our view marks the beginning of a cautious withdrawal of exceptional, post-Covid accommodation. However, with continuing emphasis on orderly evolution of yield curve and ongoing support via GSAP, OMOs and OT, markets are expected to take these measures in to its stride. Going forward, we continue to expect further baby steps towards rate and liquidity normalisation as economy continues to improve.
Suvodeep Rakshit, Vice President & Senior Economist at Kotak Institutional Equities: Overall, the policy is as expected on rates and stance. While we had expected the liquidity-related normalization measures from September/October, the RBI’s frontloading of VRRR comes with a staggered approach. Given the reasonable demand for the existing 14-day VRRR, the graded additional quantum is not expected to move the overnight rates, just yet. We, however, see this as the first signal towards calibrating liquidity. Tools like overnight VRR, further increase in quantum of VRRR, and allowing non-bank participation in the VRRR could be the measures before the onset of policy normalization. Overall, we view this policy as RBI’s signal that it remains watchful on growth while the concerns on inflation have increased. It is unlikely that the RBI will change its stance in the October policy, although the split voting pattern could further increase. We expect the start of policy normalization in the form of hike in reverse repo rate could be around the December policy after risks of further Covid wave fade amidst the higher pace of vaccination and visibility of durable growth
Madhavi Arora, Lead Economist, Emkay Global Financial Services: The reintroduction of fortnightly VRRRs with higher quantum restates the same. We note the surplus liquidity has not necessarily percolated well across the curve or segments of the rates market as asymmetric gains in credit markets. This also raises the risk of rerouting of surplus liquidity and excessive risk taking in other asset classes. We do not see the VRRR quantum increase as a step towards Reverse Repo tightening in the near-term and still see that not happening in CY21.