The monetary policy committee (MPC) on August 6 kept the repo rates unchanged at 4 percent.
Making the announcement, Reserve Bank of India (RBI) Governor Shaktikanta Das cautioned against the threat of a likely third wave of the pandemic and assured that the central bank will remain vigilant.
"The need of the hour is not to drop out guard and remain vigilant against any possibility of third wave especially in the backdrop of rising infections in certain parts of the country," he said.
Corporates are of the view that the status quo in rates and an accommodative stance by MPC will help revive the growth amidst COVID-19.
Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance said that while the MPC has decided to maintain status quo on key policy rates and voted 5-1 in favour of continuing with accommodative stance in this meeting, it has also taken few expected steps towards normalisation of excess system liquidity.
"Going forward, we continue to expect further baby steps towards rate and liquidity normalisation as economy continues to improve," he added.
Growth and inflation
The RBI has increased the retail inflation estimate for the financial year 2021-22 to 5.7 percent from 5.1 percent projected earlier while retained the GDP growth target for the financial year at 9.5 percent.
Dr Sachchidanand Shukla, Chief Economist, Mahindra Group said that this was more a ‘take it easy policy’ cue for markets from the RBI.
"A status quo on rates and accommodative stance was largely expected. However, the decision on the stance was not unanimous; one MPC member expressed reservations on continuing with an ‘accommodative stance as long as necessary to revive and sustain growth on a durable basis’. This comes as a surprise and can be construed as an early sign of normalisation in liquidity conditions (likely towards the end of the fiscal) that is likely precede any rate actions," he added.
Shukla also expressed surprise on RBI's growth projections.
"Interestingly, RBI remains quite optimistic on the strength of the rebound in the second half of the fiscal and beyond, with growth projections at 6.2 percent and 17.2 percent in Q1 FY23. Such high growth projections for Q1 FY23 seems a bit surprising, given the potential scarring from the pandemic," he added.
RBI has revised upward to 5.7 percent the estimate for Consumer Price Index (CPI) inflation for the financial year (FY) 2022 from its earlier projection of 5.1 percent.
Sandeep Bagla, CEO, TRUST Mutual Fund said that RBI has acknowledged the strong growth and negative surprise on inflation front.
"While there is no real change in the policy, bond market participants will take the nuanced change in language seriously. There is a distinct possibility that yields at the longer end, 10 years, will inch up towards 6.50% gradually. Investors should invest in bond funds with lesser than 3 years maturity to minimise interest rate risk," he added.
Demand for sops for economic revival
While corporates welcomed a status quo on rates, there is a rising expectation for incentives to revive the economy.
Shishir Baijal, Chairman & Managing Director, Knight Frank India said that an extended period of historic low interest rates would ensure home loan rates remain at current benign levels and aid the revival of real estate sector.
"We have also seen many real estate developers refinancing their borrowings at lower interest cost and benefit from the lower interest rate regime, which is crucial at this juncture when business operations are facing the pandemic pressure," he said.
Real estate was among the worst-hit sectors due to the pandemic with pay cuts cutting down disposable income for home buyers. Purchase decisions were hence deferred.
In addition to this monetary policy intervention, Baijal said that the time is ripe for the RBI and government to undertake more valiant demand stimulant measures to help the economy cross FY20 GDP levels and ensure a broad-based revival.
Lincoln Bennet Rodrigues, Founder and Chairman, Bennet & Bernard Group that runs holiday homes in Goa said that a slight reduction in the key rates would have been widely celebrated as low interest rates have been a crucial factor in the revival of the demand in the real estate sector overall.
"While the consumer is enjoying low home loan rates currently, a cut would have further intensified demand. A continuation of low interest rates regime works well for borrowers," added Rodrigues.
The MPC has cut key lending rates by 250 basis points since February, 2019 to support growth. The rate setting panel said it will closely watch the inflation-growth scenario going ahead while deciding the course of policy actions.