The Reserve Bank of India on December 4 maintained repo rate at 4 percent though continued with its accommodative stance. According to experts, the central bank has retained its focus on economic revival over inflation.
"RBI policy was on expected lines. They have prioritised growth over inflation. This is an acknowledgement that inflation drivers seem to be more supply-side led. An accommodative liquidity stance will ensure access to liquidity will not be a challenge and the ongoing recovery continues to gather steam. Guidance is better than earlier on growth and flows. This is a positive for markets," Ashish Shanker, Deputy MD and Head of Investment at Motilal Oswal Private Wealth Management told Moneycontrol.
The monetary policy committee members voted unanimously for holding repo rate at 4 percent and as a result, reserve repo rate remained unchanged at 3.35 percent.
The RBI expects inflation to remain elevated in the second half of FY21 and sees around 5 percent in the first half of FY22.
"The outlook for inflation has turned adverse relative to expectations in the last two months. The substantial wedge between wholesale and retail inflation points to the supply-side bottlenecks and large margins being charged to the consumer," said the RBI which sees CPI inflation at 6.8 percent for Q3FY21, 5.8 percent for Q4FY21 and 5.2-4.6 percent in first half of FY22, with risks broadly balanced.
The fear of a rising inflation rate is evident in the RBI governor's address, said Deepthi Mathew, Economist at Geojit Financial Services who feels the supply-side issues, demand recovery, and inflow of foreign funds could fuel retail inflation.
Jimeet Modi, Founder & CEO at Samco Group also feels inflation isn't going lower given the massive helicopter money across the world created by central banks and run-up in commodity prices such as crude, base metals.
"It is likely to remain elevated given that import restrictions are in place to support the domestic economy. Such a growth recipe will have unintended consequences of higher inflation not only in India but across the world which will be the bigger animal to tame a few quarters down the line. However, in the near term this will support recovery in financial markets and will keep the bulls charged in the capital markets," he said.
The continuity in accommodative stance and lower rates along with liquidity for a longer period, and expected recovery in economic growth in coming quarters boosted market sentiment.
Equity benchmarks hit a fresh record high today at 13,250.30 on the Nifty50 and 45,033.19 on the Sensex.
The Nifty50 climbed 71.90 points to 13,205.80 and the BSE Sensex was up 263.36 points at 44,896.01 at the time of publishing this copy.
All sectoral indices were traded in the green with the Bank Nifty and FMCG rising a percent each, but the broader markets were flat.
As expected, the RBI sees GDP contracting by 7.5 percent in FY21 against the earlier projection of -9.5 percent. "The recovery in rural demand is expected to strengthen further, while urban demand is also gaining momentum as unlocking spurs activity and employment, especially of labour displaced by COVID-19," said the apex bank in its note.
The central bank expects real GDP for Q3FY21 GDP at +0.1 percent and Q4FY21 at +0.7 percent, against the earlier projection of -5.6 percent and +0.5 percent respectively.
"Growth gets the priority once again, with inflation projected to be lower in Q4 and H1 FY22. The growth projections mirror the gradually improving ground conditions, with the overall growth for this year put at -7.50 percent, with mildly positive growth for Q3 and Q4," Joseph Thomas, Head of Research at Emkay Wealth Management said.
"The features and contents of the policy give the reassurance that lower rates and the plenty in liquidity will continue for a longer time period, till the time inflation rises so much as to derail it. The policy is supportive of both equity and fixed income markets, with its moderating implications for rates," he added.
"Liquidity remains high, while growth is gaining traction, makes us believe that RBI will adopt a wait and watch approach for the next few months. Nevertheless, the MPC reiterated its accommodative stance given the transitional phase the economy is going through, in terms of recovery from the pandemic," Amar Ambani, Senior President and Head of Research - Institutional Equities at Yes Securities said.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.