RBI Monetary Policy: India Inc says status quo on rates on expected lines; worries over COVID third wave persist

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As expected by the market and industry experts, the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) on June 4 kept key policy rates unchanged citing persisting uncertainties on the economic front due to the COVID-19 pandemic.

Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank said the policy statement has been in line with expectations with RBI revising GDP forecast lower while providing assistance to the stressed sectors.

"The RBI has also revised the inflation trajectory marginally higher given the concerns on pass-through of higher input prices," she added.

RBI downgraded the GDP growth forecast for FY22 to 9.5 percent from 10.5 percent earlier.

Some sectors, especially real-estate players were hoping for some relief on the interest rates so that it could boost demand for home buyers.

Ramani Sastri, Chairman & MD, Sterling Developers said it goes without saying that the real estate industry's perennial hope is fixed on lower interest rates.

"Any further reduction of the repo rate would have aided in ensuring adequate flow of capital in the market. However, home loan interest rates have already gone down substantially in the recent past, and are presently at an all-time low. Homebuyers will continue to take advantage of the lowest ever home loan interest rates," he added.

But, concerns around the economy and the second wave of lockdown remain.

Gaurav Garg, Head of Research at CapitalVia Global Research said the cause of concern for investors now is inflation that seems to outweigh the benefits of cheaper credit.

This, he said, was because the inflation and the pandemic are expected to impact the real income and purchasing power of end-users thereby impacting the Q1 numbers of FY22 for India Inc.

An immediate rate cut could have helped boost demand for areas like the automobile and real estate sectors.

Lincoln Bennet Rodrigues, Founder and Chairman, Bennet & Bernard Group said a rate cut would have been beneficial for consumers and would have given a boost to the current demand uptick that they have seen recently.

"For any investor, it’s a time of great opportunity and for the end-customer, it’s a good time to buy. Going forward, we would also like to see a reduction in stamp duty & registration charges to push demand further in the real estate sector that forms the backbone of several other sectors," he added.

However, there is an expectation of a rebound amidst the vaccination pace picking up.

Sachchidanand Shukla, Chief Economist, Mahindra Group said that the cut in its growth projections was largely an acknowledgement of the adverse impact of the second wave that required a sharp scaling down of Q1 FY22 numbers.

"Besides, the decision to support lending to contact-intensive services and MSMEs via special liquidity facilities is a much-needed move. However, even as monetary policy remains supportive, the onus will now shift on fiscal policy and government spending to expedite India's economic revival," added Shukla.

The India Meteorological Department (IMD) has predicted normal South-West monsoon rains this year in north and south India, above-normal in central India and below-normal in east and northeast India.

This is an important factor in economic recovery and a boost to consumption, especially in rural areas.

Nish Bhatt, Founder & CEO, Millwood Kane International said, a normal monsoon, unlock measures and the vaccination drive will help economic recovery; the second wave prompted a downward revision for the FY22 growth estimate.

"The risk of inflation persists but it is likely to remain largely with the mandated target of the central bank," he added.

RBI estimates Consumer Price Index (CPI) inflation at 5.1 percent for FY22, Governor Das said, adding, the rising trajectory of international crude prices within a broad-based surge in international commodity prices and logistics costs are worsening cost conditions.

"These developments could keep core price pressures elevated, although weak demand conditions may temper the pass-through to consumer inflation," he added.

In April, the CPI inflation came at 4.29 per cent compared with 5.52 percent in March backed by a fall in food prices. This is the fifth consecutive month that CPI inflation is within the MPC's target range.

Mihir Vora, Director & Chief Investment Officer, Max Life Insurance said marginal upward revision in inflation projections did not warrant a policy stance change.

"RBI’s announcements post-April have centred around facilitating lower borrowing costs, liquidity provision and easy financing conditions in a bid to support credit off-take," he added.

RBI has lowered its estimate for economic growth to 9.5 percent for 2021-2022 from earlier projection of 10.5 percent due to the impact of the second COVID-19 wave.