The Reserve Bank of India’s (RBI) Monetary Policy Committee decided to keep MPC rates unchanged for the seventh time straight and continued with an accommodative stance, citing the need to support ongoing growth recovery amid continued uncertainty and global financial market volatility. at its bi-monthly policy.
RBI Governor Shaktikanta Das said that the MPC has decided to leave repo rate unchanged continue with the accommodative stance as long as necessary to support growth.
Banks and financials
Dinesh Khara, Chairman, SBI
The RBI policy is pragmatic and strikes a fine balance between stance and strategy. While the policy stance continues to be accommodative to continuously support growth, a strategy of careful recalibration of liquidity management is clearly indicated with the roll out of VRRR. The policy has also nudged banks to shift to an alternate reference rate with the discontinuation of LIBOR. The extension of on-tap TLTRO scheme and the deferral of deadline for meeting the operational parameters for stressed entities will help corporates navigate through the pandemic with a degree of certainty.
S. S. Mallikarjuna Rao, MD & CEO, Punjab National Bank
Additional liquidity measures through extension of deadline of On tap TLTRO scheme till December 31, 2020 will have positive implications for stressed sectors like retail, MSME and real estate.. Amendment of guidelines related to export credit in foreign currency and restructuring of Derivative contracts is a much needed move to ensure smooth transition from LIBOR and meeting the incipient challenges. Deferral for achievement of financial parameters under Resolution framework 2.0 will address the revival difficulties faced by the businesses in meeting the operational parameters.
Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank Ltd
Although inflation is above the comfort zone with an upward revision in estimates, the MPC does view it as transitory. Going forward, we can expect easy liquidity conditions and rates to continue to support economic growth even as the central bank monitors key indicators on Covid, growth and inflation for future policy guidance and action.
Y S Chakravarti, MD & CEO, Shriram City Union Finance
RBI has maintained an accommodative stance as expected and we believe this is likely to remain for the rest of the year. We believe 2022 is when economic environment is likely to improve. The extension of TLTRO till calendar end is a positive and will give access to credit to lower rated NBFCs. Higher rated NBFCs have ample liquidity. The positive outcome of this window is that it has opened up access to long term investors like Pension Funds and Insurance Companies and that will benefit all.
Indranil Pan, Chief Economist - YES BANK
RBI has attempted and managed to balance the contradicting objectives of managing inflation expectations while also communicating the need for sustained policy accommodation. Even as the inflation forecasts for the current FY have been raised, the communication continues to be that the hump in inflation is supply-led and thus ‘transitory’ wherein the demand side push for inflation is almost absent. This is the reason for RBI to have been able to see-through the current high inflation levels.
Abheek Barua, Chief Economist, HDFC Bank
The RBI has continued with its line of supporting growth despite the recent spikes in inflation. That said, recognizing the concerns around inflation (RBI revised up its inflation forecast to 5.7 percent from 5.1 percent for FY22) and the excess build-up in systemic liquidity over the last month (at Rs 8.5 lakh crore as of 4 August), we saw the central bank take its second step towards liquidity normalization. The first being the tolerance towards some upward adjustment in the 10-year yield in July. In response to tighter liquidity conditions, we expect short-term rates to increase and return on instruments like CPs to rise.
Siddhartha Sanyal, Chief Economist and Head – Research, Bandhan Bank
While the status quo on rates with a 6-0 voting and continued “accommodative” stance were on expected lines, the split voting as regards the policy stance was a modest surprise. Still, the overall tone of policy continued to focus clearly on supporting growth recovery. Given higher global commodity prices, sticky food inflation and rise in domestic fuel prices, inflation may stay higher than for the RBI’s comfort. However, with the tentative and uneven nature of recovery, one expects the MPC to continue prioritizing supporting growth in the coming months.
Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank
We believe that the increased risks to inflation especially as the economic activity is picking up pace has prompted the MPC into taking liquidity normalization measures ahead of our expectations. We expect additional liquidity normalization measures like overnight VRRR, increased quantum of higher tenure VRRR in the months ahead before expecting a reverse repo rate hike in December.
Venkatraman Venkateswaran, Group President & CFO – Federal Bank Ltd
The very clear message from RBI comes as a continuation to the commencement of normalisation about a month back. The 10 year bond yields have moved from 6 percent to 6.20 percent in the last two months. The extension of liquidity facility won’t make much of a difference in the present situation, given the fact that banks still have not fully utilised the existing limits. Liquidity thus, is not the matter of concern at this point. Credit off take is still tepid. Accommodating & supporting growth is crucial and so has RBI prioritised growth over inflation. Gradual and steady calibrated liquidity withdrawals would continue.
Sujata Guhathakurta – President & Business Head, Debt Capital Markets, Kotak Mahindra Bank
Balanced Policy with all rates kept unchanged. While Accommodative Stance was maintained, some normalization has started, keeping in mind the higher Inflation readings and huge liquidity of Rs 10 lakh crore plus presently. Increase in VRRR amount by Rs 2 lakh crore, setting an inflation target of 5.7 percent versus 5.1 percent earlier and 5.5 percent expected by market & divided vote on the accommodative stance disappointed the market. In the short to medium term, the yield curve may flatten and we expect OMO, GSAP, Operation Twist to be used adequately to contain the rise in yields.
Rajiv Sabharwal, MD & CEO, Tata Capital Ltd
The RBI has taken note of the broad based pattern of rising inflation due to adverse supply shocks and global increase in commodity prices. However, at this juncture, growth concerns outstrips the evolving inflation dynamics. The systemic liquidity continues to remain surplus supporting rate transmission and maintaining the southward bias of the rate curve. The bond market anticipates normalisation of liquidity in the near future. It is important that the impact of the same will be absorbed without bringing volatility to the rate curve.
Vikash Khandelwal, CEO, Eqaro Guarantees
The RBI has been doing the heavy lifting to bring back the economy on track since the pandemic struck last year. It has announced more than 100 measures to support growth. The move to extend TLTRO till December will further aid growth. Over the high-frequency indicators, normal monsoon, and steady pace of vaccination indicates the RBI estimate of 9.5 percent growth for FY22 is achievable. The decision by the RBI to keep key rates and the unchanged 'Accomodative' policy stance was on expected lines. Easy liquidity will help businesses, especially the MSMEs at a time when demand is recovering. The governor has allayed concerns on inflation as well.
Dr. Rashmi Saluja, Executive Chairperson, Religare Enterprises Ltd
An increase in the rates in this situation would have impacted overall growth at a time when the government has itself maintained a high GDP growth expectation of 9.5 per cent for FY22. With regards to inflation expectations, RBI has revised inflation forecast from 5.1 per cent to 5.7 per cent. The silver lining here is that the government feels that the inflation will be transitory. The RBI has also said that it will be accommodative to sustain growth amid the pandemic pressures.
HP Singh, Chairman & Managing Director, Satin Creditcare Network Limited
The situation has significantly improved over the course of the pandemic with the continued influx of funds by the government to ease the tight liquidity position. Amidst the looming fear of a third wave and rising inflation, the government’s cautious approach coupled with steady rates and active vaccination drive provide hope for a faster revival and return to normalcy.
Prithviraj Srinivas, Chief Economist, Axis Capital
The MPC has kept policy rates on hold as expected. The only major move was an increase in Variable Rate Reverse Repo (VRRR) limits which was widely expected. However, the governor was quick to point out that VRRR limit increase does not indicate a change in monetary policy stance. We expect the timing of first policy rate increase in the future to coincide with confidence that vaccinations provide adequate protection against a relapse.
Ravindra Sudhalkar, CEO, Reliance Home Finance
The move by the Reserve Bank of India's Monetary Policy Committee to keep the repo rate unchanged at 4% was an expected move given the growth concerns hanging over the economy, especially from the impending third wave of the COVID19 pandemic. Even though inflation is high and a concern, any rate hike at this juncture would've been a deterrent to growth. Also, although the RBI maintained GDP growth forecast at 9.5% for FY22, Governor Shaktikanta Das has pointed out that the underlying conditions around aggregate demand are still weak.
For home buyers this removes any kind of uncertainty over interest rates as we can expect this accommodative stance to continue for some time. However, planning ahead and negotiating smartly with banks on home loans rates is always advisable."
Mutual Funds
Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund
The RBI MPC left key rates unchanged – on expected lines. The accommodation bias was maintained too, however with 5-1 (1 member dissenting). The Variable rev repos (VRRR) amt was also graded increased from INR 2 tn to INR 4tn over next 1 month. This policy has embarked on liquidity normalisation as a start point, being mindful of growth drivers as well. We could see the yield curve gradually flatten with shorter end moving up tad faster than longer end. Markets could start pricing in possibilities of rev repo rate hike, though the policy refrained from any such guidance.
Sandeep Bagla, CEO, TRUST AMC
The RBI policy is hawkish at the margin. The central bank has acknowledged the strong growth and negative surprise on inflation front. One of the MPC members has voted for change in accommodative stance, said . "While there is no real change in the policy, bond market participants will take the nuanced change in language seriously. There is a distinct possibility that yields at the longer end, 10 year, will inch up towards 6.50 percent gradually. Investors should invest in bond funds with lesser than 3 year maturity to minimise interest rate risk," he said.
Suyash Choudhary, Head – Fixed Income, IDFC AMC
The policy review was set against a market expectation of largely status quo on most things. The CPI forecast was expected to be raised, which would be mechanical given the higher than expected May print received in June. Additionally there was expectation around enhancement of the variable rate reverse repo (VRRR) amount from the current Rs 2 lakh crores, although this expectation wasn’t uniform across market participants. Given this, it prima facie delivered largely on expectation but with two caveats, as it were: One, a lone dissent on maintenance of accommodative stance from external member Prof. Varma. Two, RBI’s average inflation forecast for the year at 5.7 percent which is higher than what most market participants were expecting (although this can be looked positively as well since the likelihood of policy setters being negatively surprised now is that much lesser).
Bekxy Kuriakose, Head – Fixed Income, Principal Asset Management
It’s interesting to note that the accommodative stance was not entirely unanimous like last time but had a single dissent vote. While expressing surprise and concern at the recent inflationary pressures, RBI MPC is hopeful that the monsoons coupled with recent softening in global crude oil prices and supply side measures by government should help to reduce inflation in the coming months. Taking note of these concerns however and the increase in banking system liquidity thanks to RBI intervention in forex and gilt markets, the most significant announcement has been to increase the quantum of VRRR (Variable Rate reverse repo) auctions from the present fortnightly Rs 2 lakh cr to Rs 4 lakh cr in a graded manner till September 2021.
Insurance
Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company Limited
While the MPC has decided to maintain status quo on key policy rates and voted 5-1 in favour of continuing with accommodative stance in this meeting, it has also taken few expected steps towards normalisation of excess system liquidity. A phased increase in the quantum of Variable Rate Reverse Repo operations to Rs 4 trillion is one such measure that in our view marks the beginning of a cautious withdrawal of exceptional, post-COVID accommodation.
Dr Poonam Tandon, CIO, IndiaFirst Life Insurance Company
The RBI remains committed to focus on durable recovery with sustainable growth while maintaining financial stability. It is important to ensure adequate liquidity in the system during these ambiguous times with a pro-growth, ample liquidity, and continuation of the policy stance.
Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance
Today’s policy verdict can be perceived as a slight deviation from the hitherto ‘Dovish stance‘, as exemplified by MPC’s inflation forecasts being nudged higher. While the absorption of liquidity under VRRR window is set to increase in a calibrated manner pointing to unleashing of the gradual liquidity normalization process, however the reassurance to continue with its liquidity measures such as GSAP’s OMO’s OT’s etc would keep the bond market apprehensions at bay. Liquidity and credit push measures in terms of extension of MSF relaxation and extension of On Tap TLTRO will aid the credit growth in the system.
Brokerages and Institutional Equities
Anagha Deodhar – Chief Economist, ICICI Securities
While the MPC’s rate action was along expected lines, the VRRR decision and one committee member voting against accommodative stance were early signs of normalisation. It upped inflation forecast for FY22 to 5.7 percent, a tad higher than our expectation and retained growth forecast at 9.5 percent. We expect the normalisation to continue with the RBI hiking reverse repo rate in two steps starting early next year.
Naveen Kulkarni, Chief Investment Officer, Axis Securities
While there were no big bang announcements today, extension given to the earlier measures announced is positive since some sectors are yet to fully recover from the second wave of COVID-19 impact. We believe Housing Finance Companies such as HDFC, CanFin Homes and Large banks such as SBI, ICICI Bank are comfortably placed as interest rates remain in a sweet spot.
Suvodeep Rakshit, Vice President & Senior Economist at Kotak Institutional Equities
Given the reasonable demand for the existing 14-day VRRR, the graded additional quantum is not expected to move the overnight rates, just yet. We, however, see this as the first signal towards calibrating liquidity. Tools like overnight VRR, further increase in quantum of VRRR, and allowing non-bank participation in the VRRR could be the measures before the onset of policy normalization.
Amar Ambani, Senior President and Head of Research – Institutional Equities, Yes Securities
RBI acknowledges inflationary pressure, but cites them as transitory, manifested by some moderation in core inflation. On government borrowing costs, RBI is conceding to the recent rise in yields and has termed it as orderly evolution. The Central bank will persist with its OMO in secondary markets to further anchor the yield expectations. We infer that RBI is likely to stand put on the Repo rate till the end of this fiscal year, as the endeavor to stabilize growth will be a long-drawn process, given the threat of evolving COVID strains. In case, growth stabilizes later this year, the process of policy normalization will initially begin with a hike in reverse repo, rather than the repo rate.
Satish Kumar, Research Analyst, Choice Broking.
With keeping policy rate unchanged and maintaining accommodative stance, the RBI is trying to support the nascent and hesitant recovery that is trying to secure a foothold in challenging situations. Growth forecast is maintained at 9.5 percent for FY22 however central bank see some pricing pressure in economy and thereby raised inflation forecast to 5.7 percent in FY22 from 5.1 percent earlier. Further, the extension of TLTRO facility by 3 more months is a welcome move as it ensures sufficient liquidity support to stressed sectors of economy amidst ongoing pandemic.
Rating Firms
Dr M Govinda Rao, Chief Economic Advisor, Brickwork Ratings
Inflation outlook of 5.7 percent is certainly a high projection on the back of prevailing uncertainty over crude oil prices and rising cost of import of edible oils which hold key for future price movements. The better monsoon outlook may moderate food inflation though the increase in edible oil prices and transportation cost arising from elevated prices of petroleum products pose risks. Overall, we could expect a better clarity on future guidance on growth and inflation outlook in the October MPC meeting
Industry bodies
Sanjay Aggarwal, President, PHD Chamber of Commodity and Industry.
Extension the on-tap TLTRO scheme further by a period of three months, i.e. till December 31, 2021; extension of allowance to banks to avail funds under the marginal standing facility (MSF) for a further period of three months, i.e., up to December 31, 2021; and deferment of the target date for meeting the specified thresholds under Resolution Framework for COVID19 related stress to October 1, 2022 from March 31, 2022, will help meet the liquidity requirements in the country along with supporting the nascent and fragile economic recovery.
Vijay Kalantri, President, All India Association of Industries (AIAI)
Maintaining the repo rate and the growth at9.5 percent GDP growth objective, raises its CPI inflation forecast for FY22 to 5.7 percent from 5.1 percent. No doubt the recent inflationary pressures have raised concerns, however RBI further states, they are only temporary which is positive for trade and industry.
PE Firms
Mohit Ralhan, Managing Partner & Chief Investment Officer, TIW Private Equity
RBI has maintained the accommodative stance indicating that the primary focus area remains growth and economic recovery is more critical than inflation. This was on expected lines as RBI has been demonstrating a sustained commitment to growth. The September and December quarters are critical given the risk of the third wave of COVID-19 and RBI has implemented proactive measures to maintain adequate liquidity in the system. The markets are in a strong bull phase indicating significant confidence in India’s growth prospects and RBI’s policy stance extends strong support to it.
Nitin Shanbagh, Head – Investment Products, Motilal Oswal Private Wealth
While maintaining a balance between growth/inflation dynamics, RBI is likely to continue with orderly evolution of the yield curve through OMOs & GSAPs. Till durable growth recovery is seen, RBI may not resort to reversal of policy rates and would maintain sufficient liquidity in the system. However, RBI may gradually signal towards normalization of rates.
Others
D.R.E Reddy, CEO and Managing Partner, CRCL LLP
The status quo retained by the RBI signals a desire to continue stimulating growth. However, with the indicators of inflation now beginning to come through, how long this stance can be maintained is something that will need to be watched.
The good thing is that the RBI continues to tilt in favour of growth versus inflation, some of which might be good for the economy. It also hints at a possibility of looking at a more accommodative stance in the longer term so that the economic recovery can be sustained. Given the demand for metals globally, there is a possibility that some of the short-term inflationary risks can be mitigated by higher inflows of foreign exchange through exports so that the fiscal deficit is suitably managed and this needed too much pressure on the currency on account of inflation, Reddy said.
Anjana Potti, Partner, J Sagar Associates
In keeping with the accommodative stance, the RBI has also extended the TLTRO and marginal standing facility up to September 30, 2021 and December 31, 2021 respectively continuing to ease liquidity pressures on NBFCs and banks and boosts access to funds by the market. Considering the impact that the transition from LIBOR will have on the financial market, the RBI has decided to amend the guidelines related to export credit in foreign currency and restructuring of derivative contracts to permit the adoption of a widely accepted alternative reference rate in the relevant currency. As a consequence of such impending amendments the transition to an alternative reference rate will not be treated as a ‘restructuring’ under the ‘Prudential Norms for Off-balance Sheet Exposures of Banks – Restructuring of Derivative Contracts.
Dr. Alok Sheel, RBI Chair Professor in Macroeconomics, ICRIER
As widely expected, RBI has once again left policy rates unchanged. The ground situation has not materially changed since its last few monetary policy announcements. If anything, the dilemmas arising out of stagflation and the trilemma have been magnified. First, the inflation scenario, including RBI’s own expectations, has worsened even as growth and employment have still to recover. Second, the threat of reversal in US Federal Reserve policy sooner rather than later has increased. Inflation has persistently exceeded the Federal Reserve’s forecasts, even as US growth has been robust. The rule of the thumb in such circumstances is to raise rates.
Vispi Jokhi, CEO, Masina Hospital
RBI’s decision to keep the repo rate unchanged is seen as a continued support for growth and foresight that will be fruitful for the economy, healthcare sector among others as well as the common man. The lockdown implications had shrunken the economy and the nationwide sentiment but the notable measures taken by the government to consistently procure vaccines and streamline the process of the inoculation drive has led the economy on its path to recovery.
