RBI Monetary Policy: Rate decision on expected lines, then what is pulling the market lower from record high?

The size of the RBI’s balance sheet increased by Rs 3.73 lakh crore, or 6.99 per cent, to Rs 57.08 lakh crore as on March 31, 2021 from Rs 53.35 lakh crore as on June 30, 2020.

At first glance, it appears that the Indian market had little to cheer about the status quo on key lending rates and stance by the Reserve Bank of India (RBI).

Erasing all the early gains, the market benchmarks - the Sensex and the Nifty - closed in the red after the RBI MPC outcome.

In morning trade, Nifty had hit a fresh all-time high of 15,733.60.

Sensex fell 132 points, or 0.25 percent, to close at 52,100.05 while Nifty settled 20 points, or 0.13 percent, lower at 15,670.25.

What appears to have disappointed the market is the RBI's inflation projection, say experts. CPI inflation is projected at 5.1 percent for FY21-22. Inflation expectations for Q1 is 5.2 percent, Q2 is 5.4 percent, Q3 is 4.7 percent and Q4 is 5.3 percent.

"Moderate increase in inflation target could be a near-term overhang, but it remains under RBI’s reference range," said Binod Modi, Head strategy at Reliance Securities.

Track RBI monetary policy 2021 updates here

Gaurav Garg, Head of Research at CapitalVia Global Research is of the view that the cause of concern for investors now is inflation which seems to outweigh the benefits of cheaper credit as the inflation and the pandemic are expected to impact the real income and purchasing power of end-users thereby impacting the Q1 numbers of FY-2021-2022 for India Inc.

"The markets are at higher levels and therefore this phenomenon can cause the markets to consolidate here for a while or take a correction," Garg said.

Rising inflation also raises concerns that when things normalise, RBI will feel compelled to raise rates quickly to curb inflation.

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

"Real GDP growth is now projected at 9.5 percent in 2021-22 consisting of 18.5 percent in Q1; 7.9 percent in Q2; 7.2 percent in Q3; and 6.6 percent in Q4 of 2021-22," RBI Governor Shaktikanta Das said.

However, experts are of the view that a cut in the GDP forecast was broadly expected.

"In our view, reduction in real GDP target for FY22E from 10.5% to 9.5% was mostly on the expected line," said Modi.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services also said the monetary policy came completely on expected lines.

"Monetary policy came completely on the expected line; no change in policy rates, a continuation of the accommodative policy stance and 1 percent downward revision in FY22 GDP growth rate by 100bp," said Vijayakumar.

The market might have already factored in most of the moves by the RBI and as there was no big bold announcement, RBI MPC was not a major event for it.

However, there were enough positives that could give market comfort.

"The announcement of G-SAP 2.0 to the tune of Rs 1.2 lakh crores will ensure adequate liquidity in the system. On tap liquidity window for contact intensive sectors is an unconventional measure to mitigate the sufferings of segments like hotels, restaurants, tourism, bus operators, beauty parlours, saloons, etc.," said Vijayakumar.

"Special liquidity of Rs 16,000 crore for SIDBI to support SMEs and increased on-tab liquidity support of Rs 15,000 crore to banks for offering three years tenor of loan to contact-intensive sector augur well to spur economic activities in coming months," said Modi of Reliance Securities.

"Further, incremental bond purchase of Rs 40,000 crore on June 17 under G-SAP 1.0 and Rs 1.2 lakh crore in Q2FY22 under G-SAP 2.0 augur well," he said.

RBI’s MPC has decided to maintain an accommodative stance as long as necessary.

"RBI pursued its broad intent of plugging weak spots in the economy by providing on-tap liquidity with additional lending to distressed and contact-sensitive sectors," said Amar Ambani of YES SECURITIES.

"On the repo rate, we have hit the floor, with further rate cut completely ruled out given the prevalent negative real interest rates. With the space for the traditional monetary policy being constricted, we expect the RBI to continue to use its balance sheet to keep financial market conditions easy," Ambani said.

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