Repo rate unchanged: RBI policy a fine 'balancing act' between growth and inflationary expectations

Sulekha NairUpdated: Monday, June 07, 2021, 12:31 PM IST
RBI Governor Shaktikanta Das | Mitesh Bhuvad

The Reserve Bank of India has kept an accommodative stance and interest rate unchanged at 4 percent and reverse repo rate at 3.35 percent. The real GDP Growth forecast declined to 9.5 percent from 10.5 percent in FY-2022 due to setback in the economic activity in the month of April and May 2021. CPI Inflation projected at 5.1 percent in FY22. Rising Crude and Logistic Prices has put some pressure but there is some elbow room left and RBI will try to keep the inflation in the bar of 2 percent to 6, experts told Free Press Journal.

The RBI policy has yet again proved to be a fine balancing act between growth and inflationary expectations, said AK Das, MD and CEO, Bank of India. " Expanding the scope of COVID 2.0 resolution framework coupled with the recent ECLGS modification is a welcome move to support the needy segments," he said.

The RBI has once again come out with proactive set of announcements to revive the economic growth amid surge in second wave of pandemic. The decision of keeping the repo rate unchanged along with maintenance of accommodative stance is on expected lines and necessary to mitigate the growth uncertainty and inflation concerns. Announcement of on tap liquidity facility of Rs 15,000 crore will ensure credit flow to the contact intensive sectors and MSMEs including hotels, tourism, aviation, etc. which have been adversely impacted. Further, resolution of stress of MSMEs has also been addressed through enhancement of exposure thresholds to Rs. 50 crore under resolution framework 2.0. Availability of NACH on all days of the week will further the financial inclusion objectives through Direct Benefit Transfer (DBT).

The Credit Policy with accommodative stance has a clear focus on growth. Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank Ltd., said, "the central bank will ensure ample liquidity support, which will ensure rates are stable. The GDP growth estimate for FY’22 has been moderated to 9.5 percent and inflation is estimated at 5.1 percent. With the forecast of a normal monsoon, food prices should stabilise. However, upside risks to inflation do remain with increasing global commodity prices. Export demand is better due to uptick in global trade and economic growth. Overall, a policy that resonates with the current economic and pandemic situation," she added.

Despite inflationary pressures it seemed unlikely that the central bank would tighten policy as this could derail the recovery under way, said Dr Alok Sheel, RBI Chair Professor in Macroeconomics, Indian Council for Research in International Economic Relations (ICRIER). The RBI does not expect CPI inflation in 2021-22 to exceed its upper target of 6 percent, so it understandably continues to focus on its secondary monetary policy target of stabilising the business cycle, which was already in serious trouble even before Covid-19. It may be observed that RBI’s accommodative stance long preceded the COVID downturn.

In view of the second wave RBI has cut its growth forecast for 2021-22 from 10.5 percent to 9.5 percent.

RBI also feels that the fear of taper tantrums and associated capital outflows has receded for now, although it continues to be watchful and conduct two way interventions in the FE market to maintain stability.

In his last statement the Governor had indicated that the RBI was working in close cooperation with government, leading to some speculation regarding an associated fiscal package to boost growth. While there was no such reference in today’s statement, this does not diminish the fact that with the continuing overhang of bad debt clogging the transmission channels of monetary policy, fiscal policy remains by far the most potent game in town for getting the economy back on track.”

The RBI has lowered the forecast of growth for this fiscal year from 10.5 percent to 9.5 percent due to disruption in economic activity by 2nd Covid Wave but now people and business are adapting to pandemic working condition and vaccination process is expected to gather steam in coming months. Mohit Nigam, Head-PMS, Hem Securities said the country’s conomic Indicators declined in May 2021 but they remain higher than last year and economy is expected to improve with the multiple stimulus packages and acceleration in COVID vaccination.

"The RBI has kept its focus to equitable distribution of liquidity and will continue to conduct regular operations for liquidity management for proactive approach of transmission to return economy to growth," Nigam added.

In a statement issued today, Chandrajit Banerjee, Director General, CII, said “While keeping the policy rates unchanged, RBI’s move to continue to use its unconventional tools to keep yields stable amid a large government borrowing program provides succour to keep the borrowing costs contained for the private sector. The announcement of GSAP 2.0 in the next quarter is one such step in this direction. In addition, measures such as provision of on-tap liquidity window worth Rs 15,000 crore for contact—intensive sectors, special liquidity facility to SIDBI for on-lending & refinancing and expanding coverage of borrowers under Resolution Framework 2.0 are all expected to provide relief to the beleaguered sectors.”

Considering the second COVID wave impact, GDP growth forecast for FY22 reduced to 9.5 percent v/s 10.5 percent earlier, meanwhile MPC expect inflation to remain within target range and forecast at 5.1 percent for FY22. Satish Kumar, Research Analyst at Choice Broking said that some aid wa also provided to banks amidst ongoing pandemic turbulence as they can restructure loan a/c upto Rs 50 crore (earlier limit was Rs 25 crore). Additional liquidity support to SIDBI and on tap liquidity to contact intensive manufacturers to provided much needed assistance to MSME sector. MPC also ensured adequate liquidity in system and announced Rs1.2 lakh crore under G SAP 2.0 in Q2, he added.

The policy bodes well for financial assets as well as the real economy, growth and employment as RBI has again stated its resolve to maintain conducive conditions to support durable growth, said Sandeep Bagla, CEO Trust AMC. The policy is pragmatic, at the same time progressive and pre-emptive in its approach.

CPI inflation is very much in the target range of Reserve Bank of India, so at this juncture, accommodative policy with a status quo in the key policy rates is welcome, said Sanjay Aggarwal, President at PHDCCI. He said, the Chamber was expecting an appropriate cut in repo rate in the next RBI review as depressed demand has to be rejuvenated with enhanced liquidity for businesses and people.

The MPC's 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, said Madhavi Arora, Lead Economist, Emkay Global Financial Services. Of the residual Rs400bn GSAP 1.0 , around Rs 100 billion will be allocated to SDLs, while the GSAP 2.0 amount will be higher at Rs1.2tn for 2QFY21. This would further ensure lower sovereign risk premia ahead amid elevated borrowing calendar this year, she said.

The RBI has continued its dovish stance in line with market expectations, said Sampath Reddy, Chief Investment Officer at Bajaj Allianz Life Insurance, as it focuses on reviving growth and keep interest rate low to mitigate the adverse effect of COVID-led restrictions on economy.

On inflation, the CPI projection of an average of 5.1 percent for FY22 looks credible as higher oil and commodity prices is leading to elevated price pressure. Though healthy monsoon and higher crop output may somewhat contain food inflation, said Amar Ambani, Senior President and Head of Research – Institutional Equities, Yes Securities. 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 the RBI to continue to use its balance sheet to keep financial market conditions easy," Ambani said.

Welcoming the RBI's continued policy support to growth, Rajiv Podar, President, Indian Merchants Chamber said, With first quarter being ravaged by COVID second wave, growth forecast has been revised lower to 9.5 percent from 10.5 percent. Meanwhile inflation has been marginally revised up to 5.1 percent from 5.0 percent for the year, he said Liquidity focus by announcing fresh GSAP 2.0 of 1.2 lakh crore is a step in the right direction. Importantly the RBI Governor has moved the focus of liquidity from systemic to equitable distribution.

The markets could be slightly disappointed with the last tranche of GSAP 1.0 including SDL within the Rs 400 billlion limit, especially, after the announcement of a possible Rs1.58 trillion borrowing by center as back-to-back loans to the states, said Suvodeep Rakshit, Vice President & Senior Economist, Kotak Institutional Equities. 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 percent, again broadly in line with consensus estimates. We expect GDP growth at 9 percent. Estimate for average inflation was marginally revised higher to 5.1 percent. We estimate average CPI inflation at 4.9 percent. It remains well within the RBI’s comfort levels given the growth concerns, Rakshit said.

Ashvini Danigond, Executive Director and CEO, Manorama Infosolutions Pvt Ltd said the MPC has taken cognizance of the need for hastened pace of the vaccination drive and quick ramping up of healthcare infrastructure across both urban and rural areas. This is certainly the need of the hour, he said.

"Considering the upheaval that the pandemic has caused in the lives of people, policy support from all sides – fiscal, monetary and sectoral – is required to nurture recovery and expedite return to normalcy. The decision to retain the prevailing repo rate at 4 percent and continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis highlights a pragmatic approach," Danigond added.

MSMEs had certain expectation. Binod Modi, Head strategy at Reliance Securities, said, special liquidity of Rs 160 billion for SIDBI to support SMEs and increased on-tab liquidity support of Rs150 billion to banks for offering three years tenor of loan to contact-intensive sector augur well to spur economic activities in coming months. Further, incremental bond purchase of Rs400bn on 17th June’21 under G-SAP 1.0 and Rs1.2 trillion in 2QFY22 under G-SAP 2.0 augur well.

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