More-than-expected dovish RBI policy amid rising infections lifts market sentiment, focus more on growth with sufficient liquidity than inflation: Experts


The Monetary Policy Committee (MPC) on April 7 unanimously voted for holding the interest rates and kept the accommodative stance & liquidity flow intact to support the economic growth as long as necessary given the rising COVID-19 infections, which has taken the equity and bond markets positively, experts feel.

The repo rate and reverse repo rate has been unchanged at 4 percent and 3.35 percent by the MPC. The committee has also decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target going forward.

The above statement indicated that growth is more important for the Reserve Bank of India than inflation, experts feel.

“The RBI governor continued to instil the markets with confidence and is cognizance of the uptick in yields and is taking various measures to contain the volatility,” Raghvendra Nath, Managing Director at Ladderup Wealth Management said.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services also feels the monetary policy announcement is on expected lines without changes in policy rates and stance.

“However, reading between the lines, one can conclude that the stance is more dovish-than-expected with the governor reinforcing the central bank’s commitment to remain accommodative to support & nurture the recovery as long as necessary,” he said.

The bond market has taken the announcement positively with the 10-year yield moving to 6.12 percent. The governor’s assurance to ensure an orderly evolution of the yield curve also is confidence-inspiring, he believes.

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The Reserve Bank of India has maintained FY22 GDP growth forecast at over 10.5 percent, and sees Q1FY22 GDP at 22.6 percent and Q2FY22 GDP at 8.3 percent.

The Q3 FY22 GDP growth is seen at 5.4 percent and Q4 FY22 GDP at 6.2 percent, the central bank said, adding CPI inflation is expected at 5 percent in Q4FY21, which reduced from the 5.2 percent forecast earlier.

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The apex bank sees Q1 and Q2 FY22 CPI inflation at 5.2 percent, while Q3 FY22 inflation is expected at 4.4 percent and Q4 FY22 at 5.1 percent.

“RBI has demonstrated a sustained commitment to growth and maintaining adequate liquidity in the financial system, which augurs well for the coming year. Recently, the markets have been under pressure, primarily due to rising cases of COVID-19 and RBI’s policy announcements today can give it a fresh impetus,” Mohit Ralhan, Managing Partner and Chief Investment Officer at TIW Private Equity said.

The daily count of new COVID-19 infections reached to record high of 1.15 lakh on Tuesday, which has been one of the reasons for volatility and correction in the equity market. Benchmark indices corrected 5 percent from their peak in the last more than one-and-half-month.

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On Wednesday, the benchmark indices as well as broader markets rallied more than 1 percent, driven by a rally across sectors. Rate sensitive stocks including banking & financials, auto and realty were leaders among gainers.

“On macro parameters, the inflation forecast for 1HFY22 has been raised very mildly, FY22 inflation forecast is now at 4.9-5.0 percent, with risk to inflation forecast looking mostly balanced with strong food production output and to be countered by possible cost-push pressures,” Madhavi Arora, Lead Economist at Emkay Global Financial Services said.

“The FY22 real GDP growth projection unchanged at 10.5 percent with a minor downward revision in Q1FY22,” he added.

Liquidity support

“The bigger move was with regards to yield management as RBI tries to break the negative loop of liquidity (mis)communication and sovereign premia. The RBI stressed on smooth liquidity management and orderly G-sec borrowings, with a more vocal and defined secondary market GSAP 1.0 (G-sec acquisition program) to be read largely as an OMO calendar with secondary purchases worth Rs 1 lakh crore in Q1FY22. This could lead to much lower sovereign risk premia ahead amid elevated borrowing calendar this year,” Madhavi Arora said.

Taking note of the market’s discomfort and in consonance with the RBI’s commitment to ensure ample liquidity and orderly market conditions, the Reserve Bank scaled up its open market operations (OMOs) in February and conducted five special OMOs (operation twists) in February and March.

For the year 2021-22 as well, the RBI has decided to put in place what is termed as a secondary market G-sec acquisition programme or G-SAP 1.0, to give it a distinct character.

“Under the programme, for Q1 of 2021-22, it has been decided to announce a G-SAP of Rs 1 lakh crore. The first purchase of government securities for an aggregate amount of Rs 25,000 crore under G-SAP 1.0 will be conducted on April 15, 2021,” said the central bank.

“The G-Sec acquisition program is also quite significant to ensure cooling off of bond yield and financial stability given the global uncertainty around the risks related to COVID-19,” said Mohit Ralhan.

Lakshmi Iyer, CIO (Debt) & Head Products at Kotak Mutual Fund also feels the move to introduce G-SAP – secondary market G-Sec acquisition program is a master stroke by the RBI.

“This would reign in a sharp spike in G-Sec bond yields. The introduction of long0term VRRR (variable-rate reverse repo) is an extension towards normalising liquidity. Liquidity surplus, however, will and is likely to continue. We expect the yield curve to flatten from the current levels with the longer end of the yield curve compressing faster than the short end,” he said.

Madhavi Arora of Emkay expects the RBI to get more accountable and action-oriented as we move into FY22.

“After all, a lower welfare cost of public debt may be needed when public funds are used for investments addressing growing economic externalities. We see net OMO purchases to the tune of Rs4.5-5tn in FY22 amid elevated supply, some natural normalization of liquidity in FY22 and shifting out of banks SLR demand,” she detailed.

Additional Measures

With a view to nurture the recovery, the RBI also announced certain additional measures including liquidity facility for all Indian financial institutions, an extension of deadline for TLTRO on Tap Scheme, enhancement of limit of maximum balance for payments banks, permitting banks to on-lend through NBFCs, and priority sector lending (PSL) – enhancement of loan limit against eNWR/NWR.

“The measures to execute the TLRO effectively in order to flatten the yield curve was taken positively, also Liquidity support of Rs 50,000 crore to be provided to NABARD, NHB and SIDBI should promote priority sector lending,” Raghvendra Nath said.

“RBI is also indirectly expanding liquidity with an increase in ‘ways and means advances’ for states and union territories by 46 percent to Rs 47,100 crore which is generally done to help them tide over temporary mismatches in the cash flow of their receipts and payments. All of these decisions will help in surplus liquidity in the monetary system and should support growth in the near term,” he added.

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