RBI Monetary Policy: Repo fee unchanged at 4%, accommodative stance so long as essential

RBI Monetary Policy 2021: The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) saved the repo fee unchanged at 4 per cent whereas sustaining an ‘accommodative stance’ so long as essential to mitigate the impression of the COVID-19 pandemic, RBI Governor Shaktikanta Das introduced on Friday.
The central financial institution governor stated that the MPC’s determination was taken unanimously and added that the reverse repo fee too was saved unchanged at 3.35 per cent. The Marginal Standing Facility (MSF) fee and financial institution fee additionally remained unchanged at 4.25 p.c.
The MPC was largely anticipated to maintain the important thing repo fee unchanged. According to a current Bloomberg ballot, all 21 economists surveyed anticipated the MPC to depart the benchmark repurchase fee unchanged at 4 per cent, whereas the central financial institution was extensively anticipated to announce one other tranche of its so-called authorities securities acquisition program.

This marks the seventh time in a row that the RBI has maintained a establishment on coverage fee. The central financial institution had final revised its coverage fee on May 22, 2020, in an off-policy cycle to perk up demand by chopping rates of interest to a historic low.

In his speech, Das stated that the economic system is in a a lot better place as in comparison with June 2021 and added that the central financial institution will stay vigilant towards the opportunity of a 3rd wave. He stated that the MPC voted with a 5:1 majority to proceed with an ‘accommodative’ stance so long as essential to help progress.
Speaking on the retail inflation, the RBI governor stated that the CPI inflation stunned on the upside in May and added that the worth momentum nonetheless moderated.

Das stated that the financial exercise has advanced broadly together with the expectations of the MPC and monsoon revived after a short pause.
He stated that the outlook for mixture demand is enhancing nonetheless the underlying circumstances are nonetheless weak and added that extra must be carried out to revive supply-demand steadiness in quite a lot of sectors.
Speaking in regards to the Gross Domestic Product (GDP) progress, Das stated that the RBI’s projection for India’s actual GDP is maintained at 9.5 per cent for the monetary 12 months 2021-22 (FY22). The RBI hiked the primary quarter’s (Q1FY22) GDP progress to 21.4 per cent from its earlier estimate of 18.5 per cent. It additional estimated actual GDP forecast at 7.3 per cent within the second quarter (Q2FY22) vs 7.9 per cent estimated earlier, 6.3 per cent within the third quarter (Q3FY22) vs 7.2 per cent beforehand estimated and 6.1 per cent within the fourth quarter (Q4FY22) vs 6.6 per cent beforehand estimated. The actual GDP progress for Q1:2022-23 is projected at 17.2 per cent.
Speaking on inflation, Das stated that RBI has raised the FY22 CPI forecast to five.7 per cent from 5.1 per cent estimated earlier. The RBI estimates CPI at 5.9 per cent in Q2, 5.3 per cent in Q3, 5.8 per cent in This autumn with dangers broadly balanced. The CPI inflation for Q1 FY23 is projected at 5.1 per cent.
Explaining it additional Das stated that “Inflation may remain close to the upper tolerance band up to Q2:2021-22, but these pressures should ebb in Q3:2021-22 on account of kharif harvest arrivals and as supply side measures take effect. ”
The RBI governor stated {that a} pre-emptive financial coverage response at this stage could kill the nascent and hesitant restoration that’s making an attempt to safe a foothold in extraordinarily troublesome circumstances.
Speaking in regards to the Government Securities Acquisition Program, Das introduced that the RBI can be conducting two extra auctions of Rs 25,000 crore every on August 12 and August 26, 2021 underneath G-SAP 2.0.
“We will continue to undertake these auctions and other operations like open market operations (OMOs) and operation twist (OT), among others, and calibrate them in line with the evolving macroeconomic and financial conditions,” the RBI governor stated.
Shaktikanta Das additionally prolonged the on-tap TLTRO scheme by three months until December 31, 2021.
Speaking in regards to the MSF, Das stated “To provide comfort to banks on their liquidity requirements, including meeting their Liquidity Coverage Ratio (LCR) requirement, this relaxation which is currently available till September 30, 2021 is being extended for a further period of three months, i.e., up to December 31, 2021.”
How economists and market specialists reacted:
Deepthi Mathew, Economist at Geojit Financial Services, stated: “In an expected move, MPC kept the rates unchanged and continued with the accommodative stance. Though the MPC voted unanimously to keep the rates unchanged, votes for the continuance of accommodative stance were at 5:1. It shows that the inflation debate is getting more prominent. The forecast of inflation rate for FY22 was revised upwards to 5.7 per cent from 5.1 per cent announced earlier. RBI’s assurance to conduct OMOs when needed would help to keep the bond yields in check.”
 
Unmesh Kulkarni, Managing Director Senior Advisor at Julius Baer India, stated: “While the accommodative stance continues for now, the RBI’s higher inflation projection (compared to market expectations), along with the enhanced VRRR auctions, is likely to put some upward pressure on yields, especially at the short-end. The longer end (gilt) of the yield curve should largely remain range-bound for now, with active intervention by the RBI through a combination of OMO, Operations Twist and G-SAP. Overall, yields have already bottomed out some time back, and it will be interesting to watch RBI’s policy stance towards the end of this calendar year, with further stability in the domestic growth outlook, improvement on the vaccination front and developments around global commodity prices.”
 
Bekxy Kuriakose, Head – Fixed Income at Principal Asset Management, stated: “We think the possibility of further rate cuts is not ruled out but for that to happen CPI inflation needs to show meaningful downward trend closer to 4 per cent which may happen towards latter part of FY 2021. Meanwhile RBI will continue with other measures to aid credit flow to needy sectors and ensure monetary transmission. While a calendar or quantum of further OMOs was not mentioned we expect OMO purchases to continue while being episodic in nature. The disappointment of no rate cut may lead to a selloff of 5 to 10 bps in the near term. We advise investors to maintain a balanced asset allocation within debt funds with short term debt funds being the preferred category.”
 
Nitin Shanbagh, Head – Investment Products at Motilal Oswal Private Wealth, stated: “From investors point of view, focus should be towards investing in high quality roll down accrual strategies through a bar-bell approach viz. combination of short term and long term maturity strategies with weighted average portfolio average maturity of 4-5 years. For yield enhancement, investors can also consider investing upto 25 per cent in well researched REITs, InVits, select high yield MLDs, etc.”
 
Kaushal Agarwal, Chairman at The Guardians Real Estate Advisory, stated: “The RBI and especially the MPC are to be commended for maintaining an accommodative stance for the seventh consecutive time now. Their approach towards tackling the situation created by the pandemic and steps taken to help revive the economy will go down in history as being one of the finest. The reduction in stamp duty charges in some parts of the country along with the all-time low housing loan rates have given the much-required fillip to sales activity in the last few quarters. The expectation amongst stakeholders of the industry is that the banks should now further sweeten the lending rates, at least till such time that the economy gets back to the pre-COVID levels.”
 
Nish Bhatt, Founder & CEO at Millwood Kane International, stated: “As expected the MPC voted to keep the key rates and the policy stance unchanged. The decision to extend the on-tap TLTRO scheme once again till December will maintain ample liquidity and support growth. RBI’s view of current high inflation being largely transitory in nature and its focus on growth is a big positive. The economy is showing signs of revival, it needs policy support. RBI’s estimate of inflation softening post-Q2 indicates that the current policy may continue for few quarters, with a beginning of normalization by end of FY22. The policy has been largely growth-oriented, supporting easy liquidity. It will help attain the high growth as estimated by the central bank – 9.5 per cent and 17.2 per cent for FY22 and FY23 respectively.”