The Monetary Policy committee is scheduled to meet during June 2-4, 2021 for the second time this fiscal. This is at the juncture where the country is witnessing a drop in daily COVID-19 caseloads but had seen a peak of close to 4 lakh daily cases only a couple of weeks ago.
The near-term outlook for the Indian economy remains clouded with extreme uncertainty and downside risks. Since the previous monetary policy review in April 2021, most of the states in the country announced stringent lockdowns, reflected by a jump in Oxford’s Stringency Index for India from 58 at the start of April to 74 during the month of May. These restrictions have severely impacted business activities with the contact intensive sector facing the highest strain while mobility dropped significantly compared with Q3 and Q4 of FY21.
There are two important policy developments/announcements since the previous monetary policy review in April 2021:
The RBI Governor announced a series of regulatory and liquidity infusion measures on May 5, 2021
The RBI released its Annual Report for the 9-month period FY21 (July to March 2021) where indications are that the GDP growth estimate of 10.5 percent for FY22 still holds (mentions that the consensus estimates are closer to the RBI view).
Things to watch out for in June 2021 policy:
Status quo on policy rates and stance: The MPC is likely to keep monetary policy accommodative and hold policy rates steady. The policy stance and the forward guidance is likely to be “accommodative” as long as necessary to sustain growth on a durable basis while inflation remains within target.
Any changes to growth outlook? The RBI had estimated GDP growth at 10.5 percent for FY22 in its February policy and had retained it at the same level in April 2021.
With the second wave of the COVID-19 contagion being alarming, stretching healthcare infrastructure and having adverse economic implications on income and consumption, there have been downward revisions in the GDP growth forecast for FY22 by a number of multilateral institutions.
The RBI in its Annual Report pointed out that in the most optimistic scenario, the macroeconomic costs of the second COVID-19 wave can be limited to Q1-FY22 with possible spillovers into July ’21. Also, there has been an upward revision in the FY21 growth estimate by MOSPI from (-)8 percent to (-)7.3 percent for FY21. The MPC will consider both these factors while projecting the GDP growth for FY22.
Inflation outlook
The MPC had projected CPI inflation at around 5 percent for FY22 in its previous meeting. The RBI is unlikely to tinker with the inflation projection for the year despite the impact of international commodity prices which is being felt across manufacturing and services sector and the firming up of petroleum prices.
A high statistical base effect in H1-FY22 and benign food price inflation owing to post harvest arrival of kharif crops and projection of normal monsoon is likely to keep inflation within the target range.
Economic concerns/ issues for RBI
Inflation: There has been a spike in global commodity prices on the back of recovery in global demand and rapid expansion in the central bank balance sheets, which in-turn has raised inflationary risks. The wholesale price inflation of 11.5 percent in April 2021 rose to its highest level in the new series of 2011-12. Although the flexible inflation targeting mandate looks at the CPI as the inflation anchor, the concern is about the spillovers of elevated wholesale prices to retail prices in the coming month.
Downside risks to GDP growth: The resurgence of COVID-19 infections and the accompanying restrictions could be a setback for the nascent economic recovery. The near-term GDP outlook for the Indian economy is clouded with accentuation of downside risks and potential externalities of global spillovers. These downside risks include the resurgence of another wave of the pandemic in India, slower than expected pace of vaccination, staggered pace of unlock, spread of the contagion in rural districts, drop in consumer confidence, low capacity utilisation which can impede the recovery in private investment.
Asset quality of the financial sector: There has been a decline in the non-performing assets of the banking system on the back of the moratorium and restructuring announced by the RBI during FY21 and in May 2021. The RBI in its Financial Stability Report had projected NPAs to increase to 13.5 percent by September 2021 (baseline scenario). There have been reports that collections in the NBFC space have been low amidst regional lockdowns. Despite this issue, the silver lining is that due to fund-raising activities, the banks are well capitalized and the provision coverage is adequate.
Elevated yields in GSec markets: Despite the sustained liquidity support by the RBI, yields in the GSec market is likely to remain high in the back of inflationary concerns and higher projected government borrowings.
CARE Ratings expectations
No change in the repo rate. The accommodative monetary policy stance would be maintained to address economic growth concerns. CARE Ratings has revised its GDP growth to 8.8 – 8.9 percent for FY22. We expect inflation to range between 5-5.5 percent during the fiscal. We, however, believe that RBI is unlikely to revise its GDP growth outlook in the forthcoming policy but may wait for the next one for any revisions and after analysing more data-points.
The RBI is likely to continue with its open market operations, GSAP and liquidity infusion measures to support credit-off take and anchor bond yields.
