Analysts Decode What RBI Monetary Policy Means For Markets, Economy, Bond Yields

The RBI on Friday held the repo rate, its key lending rate, at four per centThe Reserve Bank of India (RBI) kept interest rates steady at record lows and reiterated its commitment to keeping policy accommodative as a second wave of COVID-19 infections threatens to derail the country’s economic recovery. The RBI on Friday held the repo rate, its key lending rate, at four per cent and kept the reverse repo rate, the borrowing rate, unchanged at 3.35 per cent. (Also Read: RBI Monetary Policy Highlights: Lending Rates Unchanged, Growth Projected At 9.5% )In a Reuters poll, all 51 economists surveyed had expected the RBI’s monetary policy committee (MPC) to leave rates unchanged as Asia’s third-largest economy grapples with various state lockdowns.Gaurav Garg, Head Of Research, Capitalvia Global Research, Mumbai”The cause of concern for investors now is inflation, which seems to outweigh the benefits of cheaper credit, as inflation and the pandemic are expected to impact the real income and purchasing power of end-users, thereby, impacting the Q1 numbers of FY 2021-2022 for corporate India.” Shashank Mendiratta, Economist, Ibm, New Delhi”On growth, the central bank reduced its GDP forecast by 100 bps to 9.5%, due to increased spread of COVID-19, lockdowns, and moderation in many high-frequency sentiment measures.”The RBI also raised its inflation projections slightly on account of upside risks emanating from the second wave. “However, given the current level of output gap and demand-side consideration in the economy, we do not anticipate any change in current policy settings for the rest of 2021. At the same time, we expect the central bank to continue to focus on liquidity measures to mitigate the impact of the pandemic.”   Madhavi Arora, Lead Economist, Emkay Global Financial Services, Mumbai”The bigger move was with regards to yield management as the RBI stressed on smooth liquidity management and orderly GSec borrowings, with a more vocal and defined GSAP.”Overall, while we do not see any action on the policy rate front in the coming months, we are poised to see a more accountable and action-oriented RBI ahead. We reckon even as yields may inch up gradually and orderly, the RBI will continue to strive fixing skewed yield and maintain its preference for curve flattening (with GSAPs and OMOs). We see net OMO + GSAP purchases to the tune of 4.5 trillion rupees ($61.64 billion) to 5 trillion rupees in FY22.” Yuvika Singhal, Economist, Quanteco Research, Delhi”The RBI’s reassurance of liquidity to markets with the announcement of a third tranche of GSAP 1.0 (G-Sec Acquisition Programme) and the next round of GSAP 2.0 of 1.2 trillion rupees was on expected lines. Inclusion of state development loans (SDLs) in the GSAP programme, however, is a welcome step and likely to curb the pressure on SDL spreads (which appears somewhat elevated at 75-80 bps currently). “Among other support measures, liquidity window for contact-intensive services sectors comes as a much-needed lifeline to mitigate COVID-induced impact.” Tanvee Gupta Jain, Chief India Economist, Ubs, Mumbai”The monetary stance has been accommodative in the past year and the policy (repo) rate is already at an all-time low of 4%. However, despite negative real rates and record-low mortgage rates, credit impulse in the system has continued to remain weak.”We expect the RBI to likely delay policy normalisation until next year (March 2022 quarter) and to keep financing conditions easy in the interim to support economic recovery and ensure the smooth functioning of the government’s borrowing calendar.”     Deepthi Mathew, Economist, Geojit Financial Services, Kochi”The announcement of G-SAP 2.0 at 1.2 trillion rupees  ($16.44 billion) for Q2FY22 shows the 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.” Sakshi Gupta, Senior Economist, Hdfc Bank, Gurugram”We expect Q1 growth at 15-16% as rural demand takes a hit and supply chain disruptions weigh on economic activity. “The RBI revised up its inflation forecast to 5.1%. We see further upside risks to this forecast as input cost pressures continue to rise and feed into retail prices over the coming months. The announcement and increase in GSAP 2.0 amount is likely to bring further relief for the bond market. Inclusion of SDLs in the GSAP is likely to provide some relief for states borrowing costs with states under increased fiscal pressure due to the second wave. “We expect 10-year yield at 5.95-6.05% for the coming months.” Prithviraj Srinivas, Chief Economist, Axis Capital, Mumbai”The central bank continues to maintain a conservative stance on CPI (5.1% for FY22 vs. 4.9% three-quarter average previously). To tackle likely pressures on domestic interest rates, the RBI highlighted presence of $600 billion foreign exchange reserves as a deterrent ahead of a crucial FOMC meeting and gave predictable indications on RBI bond-buying programme, G-SAP 2.0.”In addition, there were other credit facilitation measures for severely impacted high-contact services sectors.” Kunal Kundu, India Economist, Societe Generale, Bengaluru”The RBI scaled down its rather optimistic growth forecast for FY22 from 10.5% to 9.5%, in line with the worries expressed by them in several forums earlier as well as in their annual report about growth momentum hitting a roadblock, especially given the weakened pace of vaccination, which lies at the heart of recovery.”In fact, we do expect further downward revision going forward as more and more high-frequency data is expected to exhibit levels of activity that will not be able to justify as high a real growth as 9.5%. “Not surprisingly, they assured that they would remain accommodative for as long as the economy needs and would ensure adequate liquidity in the system. That said, we believe that expecting the RBI to do all the heavy lifting for an economy suffering from massive demand destruction, is rather unfair on the central bank. Under the current circumstance, monetary policy ought to play a supporting role to a more expansionary fiscal stance especially in the form of fiscal support to households suffering from loss of jobs and income.”



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