Growth forecast, rates: 5 key things to look for in RBI monetary policy

Monetary Policy Committee expected to hold rates and continue with an accommodative stance to encourage growth

The Reserve Bank of India (RBI) is expected on Friday to hold interest rates after a three-day meeting of its Monetary Policy Committee (MPC). The policy will likely maintain an accommodative stance, as helping economic growth remains priority. Here are key decisions to look from the review meeting:

Growth forecast likely to be trimmed

The market will look out for RBI’s GDP growth forecast for the financial year. In the last policy review meeting of April, GDP growth for the current financial year was projected at 10.5%. For the first quarter, it was projected at 26.2%. The prediction was before the second wave of the coronavirus pandemic that has hurt economic activity due to lockdowns by state governments. Most economists and rating agencies have trimmed their forecast following the second wave. Many see GDP growth for FY22 in single digit now, as compared to double-digit predictions made before the second wave.

“RBI is expected to revise growth projections downward but not significantly,” Anubhuti Sahay, head of economic research, South Asia, Standard Chartered Bank.

“We are at 8.5% as compared to the 10.2% projected earlier. (FY22) The RBI will possibly keep FY22 GDP growth projections between 9-9.5%,” Sahay told 'Business Standard'.

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“We mark down FY22E GDP growth further by 90bps to 9.0% amid asynchronous and slow state-wide unlocking process and slower-than-expected vaccine drive,” said economists at Emkay Global in a report.

“We reckon factors such as better adapted firms, stable financial conditions and robust global growth spillovers create growth buffers back home and H2FY22 should see recovery pacing again. However, we would monitor the sustainability of that recovery especially as it would again be led by capital and profits, and not improvement in labor markets and wage growth,” the report said.

Inflation concern

RBI’s focus has been to support growth since the pandemic last year. It responded with a 75-bps reduction in the policy repo rate in March 2020, reacting days after a nationwide lockdown was announced. In May, the repo rate was reduced again--by 40 bps. Since then, the central bank has maintained a status quo on the interest rates. (1 percentage points is equal to 100 bps)

After averaging 6.2% in the 2020-21--which was higher by 140 bps than the previous financial year--consumer price index based inflation (CPI) pressures are again resurfacing in the economy. Rising crude oil prices, supply-side disruptions due to lockdowns and overall recovery will put pressure on inflation. RBI’s annual report six day ago said inflation remained a key concern and constrains the monetary policy to support growth.

“In the current environment, the choices before the Monetary Policy Committee (MPC) may be limited. With the second phase of the pandemic impacting consumption and growth, the MPC will likely maintain status quo on policy rates, continue with an accommodative policy stance and ensure adequate liquidity in the system – all in an effort to stimulate growth,” said Shanti Ekambaram, Group President, Consumer Banking, Kotak Mahindra Bank.

“While it will keep one eye on inflation levels on the back of rising global commodity prices, it currently will focus on supporting economic growth,” she said.

In the April policy, CPI inflation was projected 5.2 per cent for the first and second quarter, 4.4 per cent in Q3 and 5.1 per cent in Q4. It is to be seen if the central bank changes its inflation forecast also.

Bond buying

The central bank, in the April policy, had announced a bond-buying programme from the secondary market. The Government Securities Acquisition Programme (G-SAP 1.0) aimed at enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions, RBI Governor Shaktikanta Das had said.

The programme had two rounds of bond purchases for Rs 60,000 crore, out of Rs 1 trillion announced. The market expects the central bank to announce another tranche of bond buying under G-SAP 1.0 on Friday, particularly in the light of a projected fall in revenue collection from GST.

“For the bond markets, two rounds of bond purchases under the GSAP 1.0 for the June quarter has added to Rs 600 billion off the total Rs 1 trillion,” said Radhika Rao, economist with DBS Bank.

“The next GSAP tranche for the rest of 2Q21 as well as providing an indicative GSAP scale for 3Q21 might be announced this week, just as the government announced plans to increase FY22 borrowings by Rs 1.58 trillion to pay states for an anticipated shortfall in GST revenues. The central bank’s hand will cap risk-free rates at manageable levels and by extension, keep private sector borrowing costs down, by an implicit yield control strategy,” Rao said.

Accommodative stance

Another key question is how long the central bank will continue with the accommodative stance and if it will provide a time-bound guidance on how long the policy will continue? The central bank had last year indicated that the accommodative stance would continue at least untill the financial year (2020-21) and onto the next year until growth returns on a durable basis. However, in April--which was the first policy of the current financial year--the central bank refrained from indicating a timeframe on how long it intends with such a policy stance.

Read More: RBI's MPC begins deliberations amid expectations of status quo in key rate 

Economists said that the central bank is not likely to hike rates at least for the current financial year since growth revival is contingent on how fast the country is able to vaccinate a large part of the population. The government recently indicated that the aim is to vaccinate the entire population by the end of 2021. Covid-19 vaccinations are expected to pick up from the middle of July.

“Any move on normalization is a story of the second half of the current financial year. We expect the first reverse repo rate hike in Feb 2022, not before that. Risks of such a hike getting advanced can emerge if the pace of vaccination in India picks up dramatically,” said Sahay, of Standard Chartered Bank.

Another moratorium?

Bankers and borrowers policy will closely watch the to see if the central bank comes out with another round of moratorium on loan repayments like last year.

The RBI announced in 2020 a repayment moratorium initially for three months and extended it by another three months. The central bank also allowed lenders to invoke a standstill clause, which means classification of the asset would remain unchanged during the period of the moratorium. In other words, the lenders were allowed not to classify any loan as non-performing due to non-payment of dues.

“Industry officials have sought a temporary moratorium, for instance automotive dealers and real estate firms, for the duration of the state-specific lockdowns, according to the press reports. Selected banks have also reportedly sought a moratorium for 2Q21 to tide over till 3Q just as the new recast window is being invoked. Inclusion and special concessions for large and mid-tier corporates as well as affected contact intensive industries like aviation, retail sector etc., into the fresh restructuring facility, are reportedly the other demands,” Rao of DBS Bank said.