RBI has once again assured to keep policy stance supportive of growth while it trimmed GDP forecast to 9.5% for the current financial year.
The Reserve Bank of India’s Monetary Policy Committee today decided to maintain the status quo and keep its policy stance accommodative to facilitate growth for the covid-hit Indian economy. All MPC members voted unanimously to keep the repo rate at 4% and the reverse repo rate at 3.35% in the second bi-monthly policy review of this fiscal year. Apart from the policy rates, the central bank has stepped up efforts to maintain adequate liquidity in the system as it announced GSAP 2.0 and a special liquidity window for certain sectors. RBI has once again assured to keep policy stance supportive of growth while it trimmed GDP forecast to 9.5% for the current financial year.
What do economists make of today’s developments?
Anagha Deodhar – Chief Economist, ICICI Securities: “The MPC upped inflation forecast for the better part of FY22 by 20-30bps and lowered GDP growth forecast sharply to 9.5%, mainly due to lower than expected growth in H1FY22. This shows that the committee’s priority is supporting growth recovery. The RBI also announced an on-tap liquidity window of Rs 15,000 crore for contact-intensive sectors, additional liquidity facility of Rs 16,000 crore to SIDBI. Moreover, it announced the purchase of government securities worth Rs 1.2 lakh crore under GSAP 2.0 in Q2FY22. All these measures together are likely to keep financial conditions in the economy benign and support recovery.”
Indranil Pan, Chief Economist – YES BANK: “Given the current evolution of the growth-inflation dynamics, there was absolutely no scope for the RBI to change its policy rates. Instead, the RBI endeavoured to keep the system fluid with adequate liquidity and also targeting rescue operations for the most stressed sectors in the economy. We think that over the current FY, the RBI will not have any leeway to change its interest rates to provide support to the economy. Instead, it will do whatever necessary to push credit and liquidity to the stressed areas of the economy so as to prevent erosion of the supply chains in the economy.”
Prithviraj Srinivas, Chief Economist, Axis Capital: “To tackle likely pressures on domestic interest rates, the RBI highlighted presence of USD 600 bn FX reserves as a deterrent ahead of crucial FOMC meeting and gave predictable indications on RBI bond-buying program, G-SAP 2.0. In addition, there were other credit facilitation measures for severely impacted high contact services sectors. Overall today’s measures and communication by RBI bolster current accommodative policy stance.”
Barclays India Economists: “In its statement, the MPC acknowledged the growing economic fallout of the second COVID wave, and downgraded its growth projections by 100bp, from 10.5% earlier, to 9.5% now. The press statement noted high levels of uncertainty, as regards the spread of COVID in rural areas and pressure on urban health infrastructure, that may pose some downside risks to the growth outlook going forward.”
What are market experts talking about?
Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mahindra AMC: “The RBI MPC was about G & G – Growth forecasts for FY22 were lowered by 1% while GSAP amount for Q2FY22 was increased. While CPI inflation forecasts have been increased, immediate demand-side pressures may not be a concern due to the pandemic. The inclusion of SDL in GSAP is a good move to help ease some pressure on State loans. Bond yields are likely to move in a tight range and oscillate between auction supply and GSAP led demand.”
Vikas Garg- Head Fixed Income, Invesco Mutual Fund: “Announcement of GSAP 2.0 for 2QFY22 reflects the RBI’s continued support to ensure the completion of record-high G-Sec borrowing program in a non-disruptive way, although the amount of Rs 1.2 lakh cr was a tad lower than the market expectations. Additionally, the regular use of Open Market Purchase Operations & Operating Twists is in line of RBI’s endeavour to ensure orderly evolution of the yield curve.”
Amit Tripathi, CIO- Fixed Income, Nippon India Mutual Fund: “Any extreme views on market direction need to be avoided. Our overall portfolio allocation would reflect a neutral bias on rates. The core portfolios of most open-ended debt schemes will operate slightly below the midpoints of their duration mandates. We would recommend continued discipline in investor allocations, driven primarily by their holding period considerations.”
Dhiraj Relli, MD&CEO, HDFC securities: “An increase in the quantum of secondary market purchases under G-SAP 2.0 will keep benchmark yields anchored around 6% levels. Overall, monetary policy is on expected lines and has checked all boxes.”
Nitin Sharma, Director Research & India Site Head, Fidelity International: “The downtick on expected GDP growth was expected and supported RBI’s accommodative stance while being watchful of inflation building up. On the latter, there are multiple forces at work, including widespread temporary supply disruptions. However, with a gradual reopening and a likely good Monsoon, some of the noise in data should go away, giving RBI more control. With developed economies generally close to achieving the threshold level of vaccinations, the global economic backdrop will be favourable and aid recovery for India as well.”
Jimeet Modi, Founder & CEO Samco Group: “India’s accommodative stance continues to remain in line with global peers such as Fed and ECB and this times policy was also aligned with market expectations. The spectrum of forecasts both in terms of GDP and inflation were balanced out and remained more or less on the optimistic side. The RBI has indeed given a helping hand, in whatever way possible to boost liquidity for MSMEs, the hardest hit space in this pandemic.”