Money Policy: How economists decoded the vibes & intent of RBI announcements

The Reserve Bank of India (RBI) held the repo rate — its key lending rate — at a record low of 4% on Friday, while the reverse repo rate — the borrowing rate — was unchanged at 3.35%, as the central bank sought to support Asia’s third-largest economy as it grapples with a second wave of the COVID-19 pandemic. The country’s benchmark 10-year bond yield was mostly flat after the decision.

The central bank also downgraded its FY22 GDP growth projected by 1 ppt to 9.5%.

Here is how top economists broke down the RBI policy:-
Suvodeep Rakshit, Kotak Institutional Equities

The announcements on policy rates, stance, and liquidity management was as per expected. The announcements on GSAP 1.0 and GSAP 2.0 are in line expectations too. Markets could be slightly disappointed with the last tranche of GSAP 1.0 including SDL within the Rs400 bn limit, especially, after the announcement of a possible Rs1.58 tn borrowing by center as back-to-back loans to the states. However, this would be a policy that is in line with market’s expectations. GDP growth estimate for FY2022 was revised down to 9.5%, again broadly in line with consensus estimates. We expect GDP growth at 9%. Estimate for average inflation was marginally revised higher to 5.1%. We estimate average CPI inflation at 4.9%. It remains well within the RBI’s comfort levels given the growth concerns. Overall, policy decisions were as expected and we expect the RBI to remain steady with its policy rate, stance, and liquidity management over at least the next couple of policy meetings.”

Aurodeep Nandi, India Economist & Vice President, Nomura
Monetary policy hand-eye coordination is getting increasingly complicated, as the second wave is impacting growth and that comes at a time of rising inflationary pressures. RBI’s policy actions today were largely on the expected lines — keeping all three levers — rates, stance and forward guidance unchanged and dovish, while relying on G-SAP as a tool to deliver further accommodation and to prevent any premature tightening of financial conditions. For now, we expect RBI to remain accommodative for the foreseeable future, and the timing of the RBI’s ‘policy pivot’ towards normalization will remain crucially contingent on the economy’s ‘vaccine pivot’ towards sustainable growth recovery.”

Deepthi Mathew, Economist, Geojit Financial Services
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 Rs 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.

Prithviraj Srinivas, Chief Economist, Axis Capital
The central bank continues to maintain a conservative stance on CPI (5.1% for FY22 vs. 4.9% 3 quarter average previously). To tackle likely pressures on domestic interest rates, the RBI highlighted presence of USD 600bn 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.

Amar Ambani, YES Securities
With growth slowing and rise in inflationary pressures, RBI expectedly kept a status quo on the policy rates and maintained accommodative stance, signalling continuation of easy financial conditions. The downward revision in FY22 GDP growth projection to 9.5% was quite expected, but seems little optimistic compared with consensus estimates. Nevertheless, RBI pursued its broad intent of plugging weak spots in the economy by providing on tap liquidity with additional lending to distressed and contact-sensitive sectors.

On inflation, the CPI projection of an average of 5.1% for FY22 looks credible as higher oil and commodity prices is leading to elevated price pressure. The announcement of another round of G-SAP and devolvement of various bond auctions clearly convey RBI’s stance on interest rates and government borrowing costs. On the repo rate, we have hit the floor, with further rate cut completely ruled out given the prevalent negative real interest rates. With the space for traditional monetary policy being constricted, we expect RBI to continue to use its balance sheet to keep financial market conditions easy.



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *