The Monetary Policy Committee (MPC) members unanimously voted for keeping the policy repo rate unchanged at 4 percent on February 5, while maintaining accommodative stance to revive growth and maintain liquidity. The reverse repo rate was also unchanged at 3.35 percent.
“All members of the MPC voted to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward,” said the policy statement.
The Reserve Bank of India revised CPI inflation forecast for Q4FY21 to 5.2 percent (from 5.8 percent earlier) and H1FY22 to 5.2-5 percent (from 5.2-4.6 percent earlier), and expects real GDP growth at 10.5 percent in FY22, although lower than IMF projections of 11.5 percent.
Strong rural demand and likely strengthening urban demand and demand for contact-intensive services with the substantial fall in COVID-19 cases and the spread of vaccination, the revival of consumer confidence, upbeat business expectations of manufacturing, services and infrastructure segments, fiscal stimulus under AtmaNirbhar 2.0 and 3.0 schemes of government, and the government’s focus through Union Budget on several sectors indicated acceleration in growth going forward, said the RBI.
Experts feel the RBI maintained dovish undertone with accommodative stance on liquidity till next financial year to support growth, while the inflation and growth projections could be an indication of an end of the rate cut cycle.
“The RBI MPC’s decision to keep policy rates unchanged was as expected. Today’s upbeat policy statements on growth and inflation restates our view that the rate cut cycle is over. Even as headline inflation trends lower, with economic recovery being underway, services gradually starting to open up, and pricing power coming back in some segments, core inflation will likely see some upside pressure through the year,” said Kotak Institutional Equities.
However, the brokerage sees downside risk to RBI’s inflation estimate for first half of FY22 and feels this could provide some room for RBI to remain accommodative on liquidity for a bit longer even as the cost of that liquidity will inch higher.
“The inflation estimates are a positive surprise and the expectation that the inflation will be well within the tolerance levels is also cheery for the markets and economy as a whole,” Jimeet Modi, Founder & CEO at Samco Group said.
Sampath Reddy, CIO at Bajaj Allianz Life feels the RBI MPC continued with their dovish undertone of maintaining an accommodative stance into next fiscal year — to support growth on a durable basis.
The RBI announced that it will roll back the earlier cash reserve ratio (CRR) cut (of 1 percent in March 2020) in two tranches — to 3.5 percent by March 2021-end and to 4.0 percent by beginning of May 2021.
“The normalisation of CRR levels by end of this quarter signals that the RBI has given its reassurance that all will be well under control in FY21-22,” said Jimeet Modi.
The banking sector availing funds under marginal standing facility (MSF) by dipping into additional 1 percent of SLR (which was earlier extended to March 2021 end) has further been extended by another 6 months to September 2021-end. “This should help to give access to Rs 1.53 lakh crore of liquidity,” Reddy said.
Overall Nimish Shah, Chief Investment Officer – Listed investments at Waterfield Advisors feels the RBI Monetary Policy has focused on three aspects – ensuring liquidity, road map to meet the borrowing program for FY22 and supporting economic growth by including NBFCs and new MSMEs for easier credit supply.
Gross market borrowing of the central government for 2021-22 is budgeted at Rs 12 lakh crore. As the government’s debt manager and banker, the Reserve Bank said it would ensure the orderly completion of the market borrowing programme in a non-disruptive manner.
With a view to support revival of activity in specific stressed sectors that have both backward and forward linkages and have multiplier effects on growth, the RBI had announced the TLTRO (Targeted Long Term Repo Operations) on Tap Scheme for banks on October 9, 2020.
Given that NBFCs are well recognised conduits in reaching out to the last mile in various sectors, the central bank is now proposed to provide funds from banks under the TLTRO on Tap scheme to NBFCs for incremental lending to the specified stressed sectors.
“An important development is the announcement of extension of funds to NBFCs under the on-tap TLTRO scheme to bolster credit to stressed sectors. Given NBFCs’ role in last-mile delivery of capital, the TLTRO can be expected to translate into a meaningful credit offtake in key sectors having a strong multiplier effect on overall economic growth,” Nirav Karkera, Head of Research at Fisdom said.
Other regulatory measure such as easing of CRR norms for MSME loans, relaxation of HTM limits till mid-2023 and some other norms for microfinance sector are additional liquidity management measures.
The RBI has also opened its doors for retail investors to directly invest in Government securities online.
“This will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market. This is a major structural reform placing India among select few countries which have similar facilities. This measure together with HTM relaxation, will facilitate smooth completion of the Government borrowing programme in 2021-22,” the RBI said.
Nirav Karkera feels though a move in the right direction, they do not expect this to directly impact the G-sec prices or trade volumes significantly in the near term.
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