By Upasna Bhardwaj
The MPC’s decision to keep rates and policy stance unchanged remains on expected lines. The MPC has continued to reiterate its decision to prioritise growth as long as necessary as the risks to inflation remain balanced. The MPC statement has adequately discussed the risks to inflation thereby marginally revising up the inflation readings to 5.1% in FY2022 compared to 5% in the previous meeting. Meanwhile, on expected lines the MPC has revised down the GDP growth by 100bps to 9.5%. Adequately so, the RBI continues to focus on providing liquidity to the stressed sectors rather than focussing on a blanket liquidity tools.
The assurance of policy support for growth will be necessary in the subsequent months as well given that the current environment remains wrought with uncertainties. While the overall active infection load has peaked out, there remains significant differential concerns across various states which has prompted most of them to extend the lockdown restrictions through mid-June for now. We also remain cautious on any sharp revival in consumption demand as employment and income levels have come under significant stress. We have accordingly revised down our GDP estimates to 9% from 10% earlier, with risks evenly balanced depending on the pace of vaccination drive.
Further providing comfort to the bond markets, the RBI announced a higher quantum of GSAP 2.0 (Rs1.2 tn) in line with expectations. However, inclusion of SDL purchase within the last tranche of GSAP 1.0 signals a possible inclusion of SDLs even in G-SAP 2.0. This might be marginally negative for G-Sec given the increased likely borrowing of Rs1.58 tn by center to compensate states for the shortfall in GST compensation cess. Notably, the net supply of GSec in 2Q his higher than 1Q (Rs 3.4tn vs Rs 2.4tn in 1Q -with an additional risk of part of the Rs 1.58 tn looming in 2Q as well) suggesting more aggressive measures beyond the GSAP 2.0 will necessary in the form of aggressive operation twists to manage a smooth yield curve.
Overall, RBI has done a reasonable balancing act while assuring the markets that they will continue to mitigate the risks, if any, through various measures for “as long as necessary to revive growth”. For now we expect the current guidance of the MPC to be retained at least through 1HFY22. Any room for policy normalisation in the form of increasing the overnight cost of liquidity could emerge from the 3QFY22, which will remain a function of growth revival, pace of vaccination and risk of inflation.
(Upasna Bhardwaj is Senior Economist at Kotak Mahindra Bank. Views expressed are the author’s own.)