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RBI Monetary Policy Highlights | In line with expectations, the RBI's Monetary Policy Committee (MPC) kept key interest rates unchanged on February 10 and retained the accommodative stance in its first policy meeting after Union Budget 2022. This is the tenth time in a row that the MPC headed by RBI Governor Shaktikanta Das has maintained the status
The three-day RBI MPC meeting that began on February 8, concluded today on February 10. The process was held back by a day after Maharashtra declared a day of mourning on February 6 following the death of legendary singer Lata Mangeshkar.
The last MPC held in December 2021 had kept the benchmark interest rate unchanged at 4 percent and decided to continue with its accommodative stance against the backdrop of concerns over the emergence of the new coronavirus variant Omicron. It was then the ninth time in a row that the rate setting panel had maintained the status quo.
Here are the key takeaways of RBI Governor Shaktikanta Das' speech:
-- The MPC has kept both the repo rate and reverse repo rate unchanged at 4 percent and 3.35 percent respectively. Also, the panel continued with the so-called ‘accommodative’ stance in the backdrop of elevated level of inflation.
-- The RBI projected GDP growth for FY23 at 7.8 percent. Real GDP growth of 9.2 percent in FY22 will take economy above pre-pandemic level, Das said.
-- CPI inflation forecast for FY22 has been retained at 5.3 percent. It expected to moderate closer to 4.00 percent target in second half of FY23 and provide room for monetary policy to remain accommodative.
-- There has been some loss of momentum in the economic activity due to Omicron. Considering the outlook for inflation and growth, uncertainty related to global spillovers and Omicron, there's a need for continued policy support is warranted for the economy.
-- Rupee has shown resilience in the face of global spillovers. Current account deficit seen below 2 percent of FY22 GDP.RBI is committed to smooth conduct of the government borrowing program.
-- The cap of e-vouchers has been proposed to be increased from Rs 10,000 to Rs 1 lakh.
-- Variable rate repo operations of varying tenors will henceforth be conducted as and when warranted. Second, variable rate repos and variable rate reverse repos of 14-day tenors will operate as the main liquidity management tool. Third, these operations will be aided by fine turning operations. Fourth, with effect from March 1, the fixed rate reverse repo and Marginal Standing Facility will only be available from 5:30-11:59PM on all days.
The bi-monthly policy comes against the backdrop of the Budget wherein a nominal gross GDP of 11.1 percent has been estimated for 2022-23. The government expects this growth to be fuelled by a massive capital spending programme outlined in the Budget with a view to crowd-in private investment by reinvigorating economic activities and creating demand.
Finance Minister Nirmala Sitharaman raised capital expenditure (capex) by 35.4 percent for the financial year 2022-23 to Rs 7.5 lakh crore to continue the public investment-led recovery of the pandemic-battered economy. The capex in the current financial year is pegged at Rs 5.5 lakh crore. The spending on building multimodal logistics parks, metro systems, highways, and trains is expected to create demand for the private sector as all the projects are to be implemented through contractors.With regard to borrowing, the government plans to borrow a record Rs 11.6 lakh crore from the market in 2022-23 to meet its expenditure requirement to prop up the economy. This is nearly Rs 2 lakh crore higher than the current year's Budget estimate of Rs 9.7 lakh crore. Even the gross borrowing for the next financial year will be the highest-ever at Rs 14,95,000 crore as against Rs 12,05,500 crore in the Budget Estimate (BE) for 2021-22.
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RBI Monetary Policy LIVE Updates: RBI has provided market with 'very dovish policy': Yes Bank Chief Economist Indranil Pan
"The RBI has provided the market with a very dovish policy –more so than expected by market. Growth concerns continue to play a bigger role than inflation for RBI. In terms of its forecasts on inflation, RBI indicates a glide path for inflation going down to the 4% handle in Q3 and Q4 FY23. While the RBI contends that the growth momentum remains positive, the stance however indicates that the RBI is willing to wait longer to see the growth becoming durable and sustainable," Yes Bank Chief Economist Indranil Pan said.
"For now, the RBI has decoupled itself with the monetary policy momentum in the rest of the world, where higher inflation prints are leading to central banks of the developed economies to tighten rates. We believe that RBI may be able to hold back repo rate increases for longer and may not have any compulsion to follow global central banks unless their actions have any severe implication on the USD/INR rates. We foresee 2 repo rate increases in FY23 but predicting a timeline is difficult at this point," Pan added.
RBI Monetary Policy LIVE Updates: Unchanged policy rates will continue to invoke a sense of optimism: LIC Housung Finance MD Y V Gowd
“As the housing sales across major cities are at an all-time high, the unchanged policy rates will continue to invoke a sense of optimism for home and property buyers. The policy rates have remained unchanged for the 10th time in a row, and we expect the low home loan interest rate regime to continue for some more time. All this augurs well for the sector and will boost sentiments further," said Y Viswanatha Gowd, MD & CEO of LIC Housing Finance.
RBI Monetary Policy LIVE Updates: Expect today’s policy action to continue benefiting interest rate sensitive sectors: Axis Securities' Chief Investment Officer Naveen Kulkarni
"The markets cheered RBI’s first monetary policy for the calendar year 2022 as it kept key policy rates unchanged and continued with its accommodative stance. RBI’s continuation of policy support is decoupled from the global central banks, which are adopting policy normalization, citing heightened inflationary pressure. RBI, on the other hand, expects inflation to peak out soon, forecasting lower inflation for FY23 at 4.5% from 5% earlier. GDP growth at 7.8% for FY23 looks in-line, but lower growth rates (in the range of 4.3%-4.5%) for H2FY23 will be keenly watched. RBI’s priority on the growth front is not unwarranted given that on-ground economic recovery has yet to gather momentum and private consumption lags pre-pandemic levels. We believe over the medium term, policy rates are likely to gradually harden, and markets will continue to gauge impact from global policy changes," Axis Securities' Chief Investment Officer Naveen Kulkarni said.
"We expect today’s policy action to continue benefiting interest rate sensitive sectors such as housing, real estate, banking and is positive for stocks such as HDFC, CanFin, Kotak Mahindra, and SBI," Kulkarni added.
RBI Monetary Policy LIVE Updates: 'Sensible to persist with the accommodative stance', says ICICI Securities' Chief Economist Prasenjit K Basu
"Given global headwinds and the prospect of a gradual moderation of India’s CPI inflation, it is eminently sensible to persist with the accommodative stance. A key reason to keep the policy interest rate at historic lows longer is to spur a more durable rebound in private consumption. India did not massively boost monetary growth during the worst phase of the pandemic (as the US Fed, ECB and BoE did), so there is less need for the RBI to roll back monetary accommodation this year," Basu said.
"As the strong rabi crop boosts food supply in April-June, and other supply disruptions from the Third Wave of the pandemic recede, India’s CPI inflation will moderate, allowing policy rates to remain low for longer than in the developed world. That will provide a boost to equity valuations, and help spur a broad-based recovery in consumption and investment," the economist added.
RBI Monetary Policy LIVE Updates: Rajni Thakur, Chief Economist, RBL Bank:
"With continued accommodative stance and putting any rate action on hold, RBI is walking the talk of its 'durable growth' focus. Growth projections for the next fiscal year at 7.8% reflects our concern on demand uncertainties in the second half while inflation projections at 4.5% for 2022-23 is lower than our expectations. Though high oil prices and supply issues were mentioned as risk elements, MPC’s inflation trajectory trends lower in H1 FY23 thereby ‘providing room to remain accommodative."
"Since the large government borrowing programme for the next year that has been pushing up the bond yields doesn’t find a mention yet, it’s likely that RBI is trying to buy time and focus on managing rates expectations for the remaining two months of current fiscal year for now. The signalling is quite clear in this meeting that despite global rates inching up and upwards risks on inflation levels, RBI will tilt towards dragging its feet on rates normalisation well into the next fiscal year as well while continuing with its liquidity management steps."
RBI Monetary Policy LIVE Updates: Rahul Bajoria, Managing Director & Chief India Economist, Barclays
The RBI once again pushed back against expectations of normalisation, keeping all rates unchanged, despite expectations of a small hike in the reverse repo rate. Given the bank’s clear reluctance to pull back policy support, we push back our rate hike forecasts to Q3 2022.
The Reserve Bank of India’s monetary policy committee voted unanimously to keep the repo rate on hold, as well as leaving the policy rate corridor unchanged by holding the reverse repo rate steady. The MPC once again voted to maintain its accommodative stance until the growth recovery is sustained. While Dr. Jayanth Varma voted to leave the repo rate unchanged, he again expressed reservations about maintaining the accommodative stance.
Today’s messaging and lack of policy action indicate that market expectations of policy normalisation are out of sync with the RBI’s thinking. We think the RBI remains guided by growth considerations: the bank’s FY20 forecasts of GDP growth of 7.8% in FY23 and inflation falling to 4.5% are in line with our forecasts.
While the bank flagged risks to inflation from supply bottlenecks and high imported price pressures, it still noted that demand-side price pressures are benign, and headline inflation is likely to trend lower over the coming months. We think such dovish messaging on inflation makes it difficult to envisage the RBI hiking rates in the near term. While the RBI may choose to normalise the policy corridor over the next six months, we now expect repo rate hikes to only begin from Q3 2022 (ie, the August meeting), with risks of further delays. We still expect policy rate hikes of 50bp, which would push the repo rate to 4.5% by end-2022, with the reverse repo rate likely rising to 4.25% by that time.
The RBI also flagged its desire to rebalance liquidity levels, indicating that it is taking a flexible approach to this area. The bank said that the level of daily absorptions of liquidity under these programs has risen materially, and noted that the effective reverse repo rate has risen from 3.37% in August 2021 to 3.87% presently, on a weighted average cost basis. The RBI also has decided to introduce variable rate repo operations (VRRs) and variable rate reverse repo operations (VRRRs) to manage unexpected liquidity shortages or gluts. Further, the RBI has shrunk the window through which fixed rate repo tools could be used. At the same time, the governor emphasised that the RBI will continue to ensure that government borrowings evolve smoothly, and emphasised the bank’s commitment to manage responsibly an orderly evolution of the yield curve in a cooperative manner with financial markets.
We see these liquidity actions by the RBI as signaling its desire to reduce its hand holding of markets for managing liquidity, and leave institutions to more actively manage their own liquidity requirements
RBI Monetary Policy LIVE Updates: Rajiv Sabharwal, MD & CEO, Tata Capital
• Contrary to market expectations RBI continues to maintain its rate status quo and accommodative policy stance as well. This will accelerate the growth momentum in the economy. Further, RBI has taken cognizance of the measures taken by the global central banks with respect to tightening of interest rates but remains committed to support sustained economic activity.
• The recent spike in crude oil prices and the spill over effect on the inflation trajectory is being monitored closely by the RBI. The softening in food inflation and strong agricultural output will help manage inflation within the comfort corridor of the RBI
• RBI continues to offer assurance to the markets that there will be a rebalance in the overall systemic liquidity on a dynamic basis and aims for a smooth evolution of the yield curve. The bonds market should draw comfort from this measure and alleviate any price volatility concerns.
RBI Monetary Policy LIVE Updates: Dhiraj Relli, MD & CEO, HDFC Securities
“The MPC of the RBI decided to keep key rates unchanged at its meet on Feb 08-10 and maintained accommodative policy stance. The outcome was more dovish than most economists expected. Though the intent of the RBI to support the recovery in economy in the face of disruption due to Omicron variant is commendable, economists will now fear whether the RBI will fall behind the curve, having maintained the easy monetary stance longer than most other Central Banks had. The RBI has projected 4.5% CPI in FY23 (vs 5.3% for FY22), with CPI expected to fall sustainably below 5% in Q3FY23. One hopes that the inflation trajectory will soon come under control and the bet of the RBI pays off. Quarterly GDP growth projections remain volatile due to base effect with 4.5% growth projected for Q4FY23 compared to 7.8% for the whole of FY23. Equity markets may temporarily welcome this decision but will be largely driven by the balance Q3 Corporate results, outcome of state elections and changes in global risk appetite.”