RBI Monetary Policy Highlights: RBI plans liquidity bonanza with Rs 1.2 lakh cr GSAP 2.0; keeps repo rate unchanged

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.

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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.

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This is in continuation with the sustained liquidity support which RBI has been undertaking via the on-lending facility through banks and AIFIs. The COVID-loan book idea was first announced in the April 2021 RBI policy and this has now been extended to the contact-intensive sectors. This is a positive move for these sectors which are currently facing the brunt of the 2 nd wave of the pandemic. As of April, 2021, the outstanding credit to hotels, restaurants and aviation sector has been around Rs 75,000 crs, which is only 3% of the total outstanding credit to the services sector.

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"On the liquidity issues, RBI has cleared its stance that the focus will turn now to equitable distribution of liquidity from the liquidity management. This is evident also as interest rates are eased across the spectrum and spreads have narrowed as they were linked to market benchmark rates. These proactive, pre-emptive and timely measures would continue to keep this transmission going forward. To keep supporting central and state borrowing, the announcement of GSAP 2.0 was also expected which will keep the yields going up. Overall, as RBI rightly put, policy support is needed from all sides to nurture recovery on one side, and combined efforts are also called for to keep rising prices in check on another. Going forward, expect RBI to support growth using all the space available to it," said Krupesh Thakkar, CFA, HoD, Financial Markets, ITM B-School.

Hotel stocks such as Indian Hotels, Lemon Tree Hotels, EIH Associated Hotels, HLV surged up to 20 per cent after the Reserve Bank of India (RBI) Governor Shaktikanta Das announced liquidity support to contact intensive sectors like the Hotel industry. Das announced a separate liquidity window of Rs 15,000 crore to mitigate the adverse second COVID wave impact on certain contact-intensive sectors such as hotels and restaurants. This window will remain open till March 31, 2022, with tenors of up to three years at the repo rate. Although this would aid the hotel and tourism sectors, the near-term outlook still seems to be unstable, said Likhita Chepa, Senior Research Analyst at CapitalVia Global Research. “Investors are advised to choose stocks selectively from these sectors which are supported by strong financials and placed well to utilize the measures announced by the RBI,” Chepa added.

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"An unchanged policy and ‘accommodative’ stance is expected to keep the momentum of liquidity in the economy. The manufacturing sector has been a laggard in the recent rally we have witnessed so far but rising cement and metal stocks are signalling a divergence with the manufacturing and construction company’s stock prices. Continuous injection of liquidity in the economy is expected to balance the divergence in allied sectors," said Kaushlendra Singh Sengar Founder & CEO at INVEST19.

"On expected lines, the Reserve Bank of India has kept the policy rate unchanged with a welcome indication of the continuation of accommodative stance on a long term basis as per requirement. RBI has rightly recognised the need to support growth even at the cost of current inflationary trends, relying upon, projected normal monsoon, price stability is expected with an inflation target of 5.1 % for the full year 2021-22. This could be a difficult task though considering the continued supply constraints," said Jyoti Prakash Gadia, Managing Director, Resurgent India.

Reserve Bank of India maintained its accommodative stance and kept repo rate unchanged today but Dalal Street did not seem impressed. Sensex and Nifty were down in the red. Nifty set a fresh all-time high earlier in the day. 

“RBI has maintained stability in interest rate and liquidity in the system. This will encourage the credit off-take and maintain a benign interest rate scenario in the money market system. The special liquidity to SME sectors is the further boost to GDP growth for FY2022," said Arun Kumar Nayyar, CEO, NeoGrowth Credit.

Salary, pension, interest, dividend and other payments and investments through National Automated Clearing House (NACH), a bulk payment system operated by NPCI, can be done on all days of the week from August 1, 2021, according to RBI’s “Statement on Developmental and Regulatory Policies” released today (June 4, 2021).

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Public debt will be 90% of GDP at end of March 2022, RBI Deputy Governor Michael Patra said. He added that the level of public debt is expected to drop over the next 5-6 years and hence the central bank believes the debt is sustainable right now. 

RBI has injected Rs 36,400 crore through operations in the secondary market, RBI Governor said. He added that this is in addition to the Rs 50,000 crore through GSAP 1.0.

So far 115-120 basis point transmission in rates has taken place after May 2020, RBI Governor Shaktikanta Das said today. 

The dent on the economy will impact the first quarter, going ahead economic activity might pick up, RBI Governor Shaktikanta Das said.

The dent on the economy will impact the first quarter, going ahead economic activity might pick up, RBI Governor Shaktikanta Das said.

MPC believes inflation is not persistent right now. They added that it will turn persistent when backed by demand pull. Deputy Governor Michael Patra said that RBI finds demand-pull to be weak at this juncture, therefore it has chosen to look through inflation.

The RBI expects that demand position in the economy could improve from the second quarter onwards, RBI Governor Das said.

No thinking on normalising policy stance, RBI Governor said on Friday. He added that inflation projections for the year have not been revised significantly.

Inflation print at 4.3% in April gives the RBI space for liquidity operations, Shaktikanta Das said.

We are focused on the entire yield curve, across maturities, RBI Governor Shaktikanta Das said on Friday. He added that bond yields look inverted owing to abundant liquidity but reiterated that rates are not gone up.  

"Besides the monetary policy intervention, as we come out of graded regional lockdowns and further resume economic activities, there is a greater need to provide adequate fiscal support to jump-start consumption demand. Demand stimulant measure like credit subsidy or tax waivers even for a limited period can play a transformative role until we reach the pre-COVID-19 normalcy thresholds," said Shishir Baijal, Chairman & Managing Director, Knight Frank India.

The Monetary Policy Committee (MPC) of RBI, in its second bi-monthly Monetary Policy Review of 2021-22 has kept the repo rate unchanged at 4 per cent. For home loan seekers, the RBI’s repo rate is an important yardstick to keep an eye on. Since October 1, 2019, RBI has mandated banks to offer retail loans such as home and auto loans linked to an external benchmark, which for most banks is the RBI repo rate and are called Repo Linked Lending Rate (RLLR). Every time, RBI revises the repo rate, the revision in the interest rate is much quicker for the borrower compared to the loans linked to MCLR. There may not be a big impact on the home loan interest rate even though going forward, the MCLR may see a minor fall with some banks.

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Repo rate might have hit the floor, ruling out any rate cuts in the future, said Amar Ambani, Senior President and Head of Research – Institutional Equities, YES SECURITIES. He added that with the space for the traditional monetary policy being constricted, RBI may now continue to use its balance sheet to keep financial market conditions easy.

The Reserve Bank of India has increased the maximum aggregate exposure threshold under the resolution framework 2.0. Now individual and MSME borrowers will loans up to Rs 50 crore can opt for restructuring.

"The economic activities have been impacted by the second wave of Covid, followed by the lockdown. There is also a need to enhance liquidity in the system, especially for the industries which got impacted. In real estate; as the apex bank has kept the rates unchanged, the overall positive economic indicators shall further help home buyers. Real estate industry's perennial hope is fixed on lower interest rates; the prevailing low home loan rates are already enticing for homebuyers. With inflation set to be high and economic recovery slow due to surge of Covid, residential real estate will continue to attract investment as it is a safe-haven asset. And as the second wave of covid effected the economy badly so it is expected that the government has to keep the rates constant for a longer period of time," said Honeyy Katiyal, Founder of Investors Clinic.

The Reserve Bank of India ensure that will continue using all instruments at its command and work to revive and sustain growth on a durable basis. "Needless to add, the consistency and credibility of our communications are reinforced by our visible actions," they added.

“The policy statement has been in line with our expectations with RBI having revised down its GDP forecasts while providing assistance to the stressed sectors. The RBI also has revised the inflation trajectory marginally higher given the concerns on pass through of higher input prices. The higher asset purchases under the GSAP program in 2QFY22 is also in line with our expectations. However, given that SDL purchases are also included in the last tranche of GSAP 1.0, suggesting a similar inculsion in GSAP 2.0, it may be marginally negative for the Gsec markets given that a higher purchase was expected in order to offset the supply concerns emanating from the higher Gsec issuance expected to meet the GST compensation cess shortfall to the States. Needless to say the pressure on states’ finances is increasing and hence the support from RBI is likely to ease the SDL yields marginally," said Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank.

The Reserve Bank of India will purchase the remaining Rs 40,000 crore worth of government securities under the GSAP 1.0 on June 17. RBI Governor Shaktikanta Das said that of this, Rs 10,000 crore would constitute purchase of state development loans (SDLs).

The Reserve Bank of India will purchase the remaining Rs 40,000 crore worth of government securities under the GSAP 1.0 on June 17. RBI Governor Shaktikanta Das said that of this, Rs 10,000 crore would constitute purchase of state development loans (SDLs).

"Governor Das has reiterated that the central bank's priority now is to support growth. That's why the MPC has stated that 'the accommodative stance will continue as long as necessary' even while raising the CPI inflation forecast to 5.1% for FY 22. The announcement of G-SAP  2.0 to the tune of Rs 1.2 lakh crores will ensure adequate liquidity in the system. On tap liquidity window for contact intensive sectors is an unconventional measure to mitigate the sufferings of segments like hotels, restaurants, tourism, bus operators, beauty parlours, saloons etc. Upward revision of inflation rate will raise bond yields marginally in the short run," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Upside risks to inflation emanate from the persistence of the second wave and consequent restrictions on activity on a virtually pan-India basis, the Reserve Bank of India said. "In such a scenario, insulating prices of essential food items from supply-side disruptions will necessitate active monitoring and preparedness for coordinated, calibrated and timely measures by both Centre and states to prevent emergence of supply chain bottlenecks and increase in retail margins," the central bank added.

The RBI now forecasts GDP growth to be 9.5% in 2021-22. Here's how the RBI thinks the economy will perform in the coming quarters.

18.5 per cent in Q1
7.9 per cent in Q2
7.2 per cent in Q3
6.6 per cent in Q4

The MPC noted that the second wave of COVID-19 has altered the near-term outlook, necessitating urgent policy interventions, active monitoring and further timely measures to prevent the emergence of supply chain bottlenecks and build-up of retail margins. "A hastened pace of the vaccination drive and quick ramping up of healthcare infrastructure across both urban and rural areas are critical to preserve lives and livelihoods and prevent a resurgence in new waves of infections," the MPC said.

"We thank the RBI for continuing with their accommodative stance. The second wave of pandemic and intermittent lockdowns across major cities has led to economic uncertainties across the country. There is also uncertainty around the vaccination and the increasing input costs is having a catastrophic impact on the survival of few businesses. Therefore we urge the Central Government to address the deteriorating health of MSMEs and various other sectors which have been severely impacted by the second wave of the pandemic. The low-interest rates have been a crucial factor in the revival of the demand in the real estate sector.  Looking at the record transactions in the previous quarters where the homebuyers took advantage of the stamp duty benefit before the March deadline, we urge the State Government too to reconsider their decision on the stamp duty waiver in interest of the homebuyers again," said Pritam Chivukula Co-Founder & Director, Tridhaatu Realty Hon. Secretary, CREDAI MCHI.

"In an expected move, RBI maintained the status quo in policy rates. To support and revive the economy, RBI would continue with the accommodative stance as long as it is needed. The Governor cautioned about the factors that could put upward pressure on inflation. The announcement of G-SAP 2.0 at INR 1.2 lakh crore for Q2FY22 shows RBI’s commitment to keeping the bond yields in check. The inclusion of SDL on G-SAP would support state government borrowings from the market," said  Deepthi Mathew, Economist at Geojit Financial Services.

The central bank will conduct GSAP 2.0 worth Rs 1.2 lakh crore in the second quarter of this financial year. RBI Governor Shaktikanta Das said that he expects the market to react positively to the move.

The Reserve Bank of India now believes that the Indian economy will grow at 18.5% from the earlier predicted 22.6%. RBI has cut FY21-22 GDP projections to 9.5% from 10.5%.

The sudden rise in covid-19 infections and facilities has impaired the nascent recovery that was underway but has not stuffed it out, said RBI Governor Shaktikanta Das.

RBI said that it will open a special liquidity window of Rs 15,000 crore till March 30, 2022, with tenors of up to 3 years at the repo rate. Under this banks can provide lending support to hotels, restaurants, travel firms, aviation ancillary services and other services that include private bus operators, car repair services, spa, and saloons.