RBI Monetary Policy Committee Highlights: Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) today announced its decision to maintain the status quo and keep key interest rates unchanged. Now repo rate sits at 4% while the reverse repo rate is at 3.35%. The Monetary Policy Committee has kept rates unchanged for the ninth consecutive policy meet. Rates were cut twice last year with a 75 bps cut in March, followed by a 40 bps cut in May. The RBI had brought down rates keeping in mind the challenges posed by the covid-19 pandemic and the resultant lockdown. The Reserve Bank of India has maintained its GDP growth projects for this fiscal year at 9.5%.
“The MPC meeting took place at a time when the country is coping with high inflation, despite the fact that the rate has declined from its peak in June 2021, when it was above 6%. However, the economy grew at a record pace of 20.1 per cent in the April-June quarter compared to the same period last year, when a nationwide lockdown caused by the Covid-19 outbreak had halted almost all economic operations. The pandemic and lockdown was a silver lining for the real estate sector given it is a safe-haven and tangible asset at the time of crisis. This led to increased investment and home-buying in the last two years. A low home loan interest rate regime has been greatly instrumental in further stimulating India’s real estate sector, especially during the festive season. The sentiment for the real estate sector, therefore, remains positive and the same is also reflected in the S&P BSE realty index as it continues upward movement,” said Ram Raheja, Director at S Raheja Realty.
“Continuing with its calibrated liquidity management policy to maintain financial stability, RBI emphasized that VRRR would be the main tool for liquidity adjustment indicating gradual policy normalization on the liquidity front. While stating that headline inflation will peak in Q4 of this fiscal year, RBI maintained its inflation projections at 5.30% for FY22 and a dovish forecast at around 5% thereafter. The decision to allow banks to infuse capital in their overseas branches and subsidiaries and repatriate profits without seeking prior approval of RBI will provide much needed operational and financial flexibility to the banks. Announcement of discussion papers on charges on digital payments in India and on prudential norms for the investment portfolio of banks are positive steps,” said Rajee R, Chief Ratings Officer, Brickwork Ratings.
“The RBI has maintained continuity in its accommodative stance by keeping the key rates unchanged. While India has emerged as the fastest-growing major economy the RBI’s decision today will further support growth and hasten the economy’s return to normalcy. The central bank has been pushing for a stable policy regime as the economy recovers in aftermath of the pandemic. A phased unwinding of liquidity, stable energy prices, and the manner in which the government navigates through the pandemic will be key to growth in FY22 & FY23,” said Vikash Khandelwal, CEO, Eqaro Guarantees on RBI monetary policy.
“The low-interest regime and adequate liquidity into the system is critical to further strengthen the domestic market. Even while RBI has announced measures to further mop up excess liquidity, it has also convinced that adequate liquidity will be maintained as required. We hope, the monetary policy announced today will help maintain the economic growth momentum even in the wake of the new variant Omicron. The low interest rate regime has been instrumental in reviving the real estate sector in the last 6 quarters through their systematic approach. RBI’s efforts, along with other demand stimulant measures, have helped revive demand that had been languishing for close to 7 years prior to 2020. The continuance of the accommodative stance will help further the cause for the sector,” said Shishir Baijal, Chairman & Managing Director, Knight Frank India.
“The RBI’s decision to maintain the repo rate unchanged at 4%, point towards the road to economic recovery. An overall economic activity progressing towards retained inflation is good news and showcases that the overall economic activity in the country has evolved. While the rise in commodity prices has put upward pressure on input material costs, the economy’s low interest rate has been a major contributor to the housing sector’s recovery. When the real estate industry was just getting back on its feet, it was slammed by the new variant. The new COVID variant Omicron has again pushed the global and Indian economy into a state of uncertainty and nervousness. In order to encourage consumption and investment in the real estate sector, consistent demand stimulant measures and favorable financing conditions would be required. Compare to last year, we are in a much better place owing to the proactive measures taken by the government which is resulting into achieving stability in the economic fundamentals of the country,” said Rohit Poddar, Managing Director, Poddar Housing and Development.
The overnight liquidity management CY22 onwards will happen through the auction route, making fixed overnight reverse repo irrelevant and thus making the Reverse repo floating. While this is welcome as far as liquidity repricing is concerned, we believe that SDF as a policy tool at the margin could have tried in this policy. The quantum of 14-day VRRRs for the December calendar has been increased – going to Rs 7.5tn by end-Dec’21, while the governor stated higher tenor of 28-day or quantum would be used as per the need of the system. RBI to opt for gradual transition: In all, RBI will likely tread cautiously on market preparation. We do not rule out introduction of SDF as a tool at lower bound next year as Reverse repo becomes floating. In our view, the introduction of uncollateralized SDF could significantly enhance the central bank’s sterilization capacity, especially as the liquidity deluge dilemma will continue in the coming months as well. The journey from current Rs8.5tn+ system liquidity to a pre-Covid Rs2tn+ will be a long-drawn one, which could push RBI to explore new tools to manage durable liquidity/any idiosyncrasies amid collateral constraints under VRRRs.
~ Madhavi Arora, Lead Economist, Emkay Global Financial Services
The projection for real GDP growth is retained at 9.5 per cent in 2021-22 consisting of 6.6 per cent in Q3; and 6.0 per cent in Q4:2021-22. Real GDP growth is projected at 17.2 per cent for Q1:2022-23 and at 7.8 per cent for Q2
~ RBI
“The policy was as expected and cautious on the uncertainty due to the Omicron variant. Also, the RBI continued with the liquidity normalisation on expected lines without any explicit signal of liquidity withdrawal. The inflation estimates are also lower than what the markets are expecting. Broadly, the policy is more dovish-than-expected possibly given the uncertainty from the new Covid variant. If the Omicron variant is benign, we expect reverse repo hike of around 20 bps possible in the February policy and tad more aggressive liquidity withdrawal,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.
Going forward, we fear that real GDP growth could be lower than the RBI projections, with inflation falling broadly in line. Along with the rising threat from the Omicron variant, there is a possibility that a hike in reverse repo could be postponed further to April 2022. However, if growth turns out to be better than our expectations (or in line with/better than RBI projections) and Omicron threat doesn’t materialize, a 15bps hike in reverse repo rate in Feb’22 cannot be ruled out. In any case, the Union Budget 2022-23 will also play an important role in the next MPC meet.
~ Nikhil Gupta, Chief Economist, Motilal Oswal
Going forward, we fear that real GDP growth could be lower than the RBI projections, with inflation falling broadly in line. Along with the rising threat from the Omicron variant, there is a possibility that a hike in reverse repo could be postponed further to April 2022. However, if growth turns out to be better than our expectations (or in line with/better than RBI projections) and Omicron threat doesn’t materialize, a 15bps hike in reverse repo rate in Feb’22 cannot be ruled out. In any case, the Union Budget 2022-23 will also play an important role in the next MPC meet.
~ Nikhil Gupta, Chief Economist, Motilal Oswal
“The MPC expectedly maintained status quo on the policy rates and stance. The rhetoric too has remained focused on maintaining durable growth as long as inflation remains well in check. We continue to expect RBI to fine-tune the surplus liquidity to manage rates and consequently provide guidance on the operating target rate shifting closer to the Repo rate. We retain our base case of reverse repo rate hike in February,” said Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank.
“Reposing faith in the visible growth impulses and control on projected inflation, a status quo on the policy rates has been maintained by RBI on expected lines. Simultaneously, the continuation of accommodative stance also bodes well for the emergence of a vibrant economy, out of the sustained revival path. This will, however, require the additional capital expenditure in the desired sectors, besides the steps already initiated on boosting demand and removing supply-side constraints. On the liquidity front also, RBI has indicated a calibrated approach, with an additional amount of Rs 1.50lac crore for 14 days VRRR, and allowing prepayment of TLTRO aiming at a rebalancing of liquidity in a phased manner. Overall a hand holding policy for growth with a hawkish eye on inflation,” said Jyoti Prakash Gadia, Managing Director, Resurgent India Limited.
“On expected lines, RBI has continued with its accommodative stance towards the monetary policy and has maintained the repo rate. It is the right decision at this stage as the economy still needs a lot of support from the central bank to sustain the expected growth rates. Easy monetary policy by was of sufficient liquidity in the banking system and low-interest rates shall play a crucial role in reviving demand and kickstart the capex cycle. The fear of coronavirus derailing the Economy once again through another wave is real and highly probable. These times requires high degree of monetary and fiscal support and the RBI is rightly dealing with it through its easy policy,” said Raghvendra Nath MD Ladderup Wealth Management.
“The much-awaited RBI Monetary policy is out and we welcome this move by MPC on maintaining the interest rate flat. This will further boost the auto sector mainly targeting 4 wheelers and CVS. This is currently the hot market as we are seeing many innovations and new players entering the space,” said Ashish Sarangi, RIA and CSO of Pickright Technologies.
RBI will absorb more liquidity from the market using variable rate reverse repo auctions from January, Shaktikanta Das said today.
RBI will undertake operation twists and OMOs as and when needed, RBI Governor Shaktikanta Das said.
Headline inflation will peak in Q4 of this fiscal year and soften thereafter, said Shaktikanta Das. He added that the RBI projects CPI inflation at 5.3% for FY21-22.
Headline inflation will peak in Q4 of this fiscal year and soften thereafter, said Shaktikanta Das. He added that the RBI projects CPI inflation at 5.3% for FY21-22.
RBI today kept real GDP growth at 9.5% for the current financial year, consisting of 6.63% in Q3 and 6% for Q4, RBI Governor Das said.
Overall the economic recovery that was interrupted by the second wave of covid has been gaining traction but it is not strong enough to be durable, hence policy support is needed, Shaktikanta Das said.
RBI Governor Shaktikanta Das said that the reduction in excise duty and VAT in fuel prices is likely to support demand. RBI MPC has also taken note of the reduction in crude oil prices.
RBI Governor said that data indicated consumption demand is improving with rural demand picking up helped by agriculture sector.
MPC voted unanimously to keep repo rate unchanged at 4% while the vote to keep the reverse repo rate at 3.35% was taken by a majority of 5:1.
MPC policy outcome will be announced soon as RBI Governor Shaktikanta Das started his address.
The Indian economy has hauled itself from a deep economic crisis, said RBI Governor Shaktikanta Das. He added that inflation is near the target area.
The banking system has been flushed with surplus liquidity for the last two and half years and despite measures by the RBI to rein in the surplus, it continues to be sizeable. The daily liquidity surplus (net outstanding) has widened from an average Rs 5.17 lakh crore during Apr to mid -Aug’21 to Rs. 7.6 lakh crore since then.
~ Care Ratings
“We expect a status quo on repo rate and continuation of the accommodative stance in the monetary policy review on 8 December. A 20bp hike in reverse repo rate (RRR) is possible, but may not matter much as call rate (3.5%) is already above the RRR (3.35%),” said analysts at Edelweiss
We expect the RBI to continue with liquidity normalisation, probably increasing the quantum of longer tenor variable rate reverse repo (VRRR) auctions. But, the reverse repo rate hike will most likely be reserved for the Feb’22 meeting. We are factoring in a hike in the repo rate in 1QFY23.
~ Nirmal Bang
At the upcoming policy meet, we do not expect any change on the interest rate front, nor do we foresee a shift in the monetary policy stance of the RBI. The MPC’s announcement would be closely watched for its assessment of the evolving economic scenario and price levels as well as how it tackles the surplus liquidity in the system, elevated bond yields and uneven credit uptick.
~ Care Ratings
With growth on a strong footing, the RBI is inching towards withdrawal of its extra-accommodative policies. But with concerns emerging around a new COVID variant, we think the central bank is likely to guide for a very gradual path of policy normalisation.
~ Rahul Bajoria, Barclay’s Bank
The current liquidity flux looks somewhat sticky ahead, with an expected increase in currency in circulation being offset by government drawdown in surplus (implying increased spending) and possible capital flows. While FDI flows may remain steady ahead, further inflows to the tune of US$35-40bn could potentially come from India’s bonds inclusion in global indices in one year’s period.
~ Emkay Global
Given the uncertainties associated with the scale of economic recovery, the RBI is expected to maintain its growth focus and continue with the accommodative monetary policy stance even as it moves towards gradual normalization. MPC is likely to maintain key interest rates i.e., the repo rate and reverse repo rate at a record low of 4% and 3.35% respectively. Policy rate hike unlikely before Q1 FY23. The reverse repo rate corridor (over the repo rate) could be narrowed from the current 65 bps in a graded manner from February 2022.
~ Care Ratings