On April 07, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) voted unanimously to leave the policy repo rate unchanged at 4 per cent as expected and continue to maintain an accommodative stance.
Unlike the previous policy in February 2021, where the central bank gave a time-based guidance to remain accommodative till the end of fiscal 2021-22 (FY22), this time it shifted to a state-based guidance ensuring support till the economy revives on a durable basis. Perhaps the resurgence of COVID cases has something to do with this shift in guidance.
RBI has moderately increased the inflation guidance while keeping the gross domestic product (GDP) growth guidance for FY22 at 10.5 per cent. Elevated fuel prices and core pressures are likely to keep the average retail inflation in FY2022 well above 4 percent, the mid-point of the MPC’s inflation target band. CPI inflation is now projected as; 5.2 per cent in H1FY22, 4.4 per cent in Q3 and 5.1 per cent in Q4 of FY22.
Bond market was relieved and equity markets, too, got excited after the Governor announced, ‘Secondary market G-sec acquisition programme or G-SAP 1.0’, wherein the RBI will commit upfront to a specific amount of open market purchases of government securities thus anchoring the yields and ensuring comfortable liquidity conditions. 10-year G-Sec fell almost 10bps from intra-day high and is now at 6.07 per cent. Guidance on the quantum of G-Sec purchases (Q1 FY22 – Rs 1 trillion) offered comfort to debt market participants on the backdrop of a huge supply calendar. This shows the resolve of the RBI to keep G-Sec rates under check despite the large borrowing program.
The MPC noted that underlying inflation pressures emanate from high international commodity prices and logistics costs. The recent surge in infections has imparted greater uncertainty to the outlook and needs to be closely watched, especially as localised and regional lockdowns could dampen the recent improvement in demand conditions and delay the return of normalcy. The MPC, however, noted with satisfaction the investment-enhancing and growth-supportive reform measures taken by the Government.
Overall RBI monetary policy was on expected lines and the policy statement highlighted its commitment to do whatever it takes to ensure financial stability and insulate domestic financial markets from global spillovers, while ensuring calibrated sustainable recovery.
The markets have reacted well to this measure as this will result in rates not rising and in fact easing down for businesses. That said, the impact of the MPC announcements will wither away in a couple of days and the markets will keep responding to other triggers including Covid progress and corporate results.
The RBI’s GDP estimates of 10.5 per cent for FY22 seem achievable going by the current conditions. In case the Covid situation does not worsen, we may even exceed this forecast.
Equity investors need to be stock specific going forward. On an overall basis, the markets seem to be fairly valued, discounting a normal case scenario. While the market impact of positives from the MPC meet outcome may be seen with a lag, one must also be aware of the way the corporate earnings growth could behave in case the Covid cases take time to come under control. Meanwhile, a rise in cases will continue to cause damage to financials across most corporates and lenders.
Deepak Jasani is head of retail research at HDFC Securities. Views are personal.