As expected, the MPC voted unanimously to leave the policy repo rate unchanged at 4 per cent, for the fourth consecutive time. The accommodative stance of the monetary policy is likely to continue till the end of FY22 and would be supportive for growth complementing the budgetary measures announced, ensuring revival in growth on a durable basis.
The MPC noted the consumer confidence is reviving, and business expectations of manufacturing, services and infrastructure remain upbeat. The flow of financial resources to the commercial sector has been improving. RBI expects Real GDP growth at 10.5 per cent in 2021-22 (as against 11 per cent mentioned in the Economic Survey) – in the range of 26.2 to 8.3 per cent in H1FY22 and 6.0 per cent in Q3FY2022.
Inflation numbers in the last two months have turned out to be better than what was expected at the time of the December meeting which resulted in RBI revising its inflation projections downwards given the high base effect. CPI inflation has been revised from 5.8 per cent to 5.2 per cent for Q4:2020-21, 5.2 per cent to 5.0 per cent in H1:2021-22 and 4.3 per cent for Q3:2021-22, with risks broadly balanced. Also, key outcome to be monitored on the inflation front would be the inflation target for the next five years that Government will be reviewing by March 2021. We believe that excess liquidity and budgetary spends (although more in capital nature) would find its way in rising core inflation given the fact that we have seen recovery in consumption.
The year 2020 was a year in which monetary policy did much of the heavy-lifting in terms of its liquidity operations, accommodative policy stance and pro-growth policy. It seems that in calendar 2021 the Government has shifted the gear and will do all the heavy lifting after having announced growth focussed budgetary measures. However, support from RBI is indeed needed at this juncture to strike the right balance in ensuring enough liquidity in the system and RBI Governor time and again in his speech assured comfortable liquidity in the banking system going ahead.
Bond market seems to be unnerved by CRR phased restoration (50bps increase in March 2021 and another 50bps increase in May 2021) and monetary policy normalisation. The Governor mentioned that the CRR normalisation would open up space for a variety of market operations to inject additional liquidity; so perhaps we would see more active market participation by the RBI. Although RBI Governor conveyed that the RBI will continue to remain accommodative in liquidity management; absence of any concrete measures as expected by a set of bond traders weighed on the yields with 10-yr Gsec yields jumping 8bps from 6.07 per cent to 6.15 per cent.
Bond investors need some confidence that the RBI will ensure absorption of excess supply of government securities through its open market operations and other liquidity tools. Markets expectation for an OMO calendar did not come through which is causing some nervousness in the backdrop of an all time high borrowing program for the next financial year.
Inclusion of NBFCs in the On-Tap TLTRO scheme, extension of the relaxation in marginal standing facility upto Sep 30, 2021 and credit to eligibility of credit to new MSME borrowers being deducted from NDTL calculation for CRR were quite re-assuring of RBI’s role in tackling the revival of targeted stressed sectors and liquidity management.
Announcement about direct online participation by retail investors in Government securities in both primary and secondary market is a big initiative which will broaden the investor base. However it is too early to comment on how much impact it will have on taking the burden off from huge borrowing calendar ahead; specifics of the scheme will be out soon. However this measure can help in improving and creating sticky demand for Gsecs over time. Extension of the previous enhanced limit of 22 per cent of SLR in HTM category till March 2023, will facilitate smooth completion of the Government borrowing programme in 2021-22.
Since fiscal policy is the front mover this year; liquidity management/withdrawal needs to be done in more calibrated manner that it does no cause too much disruption in bond yields and therefore on financial conditions. The RBI governor did not make a mention of the fiscal situation or likely inflation spurt due to the expansionary Budget.
We don’t expect any policy rate cuts over the next few quarters and the policy stance is likely to remain firmly accommodative. RBI may opt to normalise the policy corridor in the next fiscal.
The MPC meet outcome is neutral to different sectors. Although some sectors were eyeing for cut in rates, this was impractical going by the large spend envisaged by the Budget. NBFC sector now has access to TLTRO funds and hence sentimentally they may do well. Financials generally may be back in favour due to end to rate cuts and improvement in asset quality. Rate sensitive sectors may have been disappointed by no indication of softness in interest rates. However volumes generally may improve across the board due to push to the economic growth by the recent Budget and hence the trigger for rate cuts may not be needed now.
(Deepak Jasani, Head of Retail Research, HDFC securities)