At first glance, it appears that the Reserve Bank of India (RBI) said all that the market wanted to hear as the equity barometer Sensex vaulted nearly 700 points intraday after RBI Governor Shaktikanta Das announced a status quo on rates and signalled the central bank will not allow growth to lose steam.
Sensex closed 460 points, or 0.94 percent higher at 49,661.76 while Nifty settled 136 points, or 0.92 percent, up at 14,819.05.
The rally was broad-based as the BSE Midcap and Smallcap indices rose 0.82 percent and 1.30 percent, respectively.
The RBI MPC voted to maintain the repo rate at 4 percent, reverse repo rate at 3.35 percent and governor Das said the accommodative policy stance will continue.
Even though Das did not mention for how long the accommodative stance will continue, the market took a sigh of relief as, at this time when COVID-19 is surging, the market and the economy do not look ready for policy normalisation.
A status quo on rates and stance was expected but what cheered the market most is that the RBI sounded more dovish than expected. It underscored that the COVID-19 remains the biggest challenge but it will not dent the growth much this time and the central bank is better prepared to counter the impact of the pandemic.
RBI maintained the GDP growth outlook for FY22 at 10.5 percent. The MPC had projected this estimate during the previous policy announcement. Q1FY22 GDP growth outlook is 26.2 percent, and for Q2FY22 at 8.3 percent.
"The monetary policy announcement is on expected lines without changes in policy rates and stance. However, reading between the lines, one can conclude that the stance is more dovish than expected with the governor reinforcing the central bank's commitment to remain accommodative to support and nurture the recovery as long as necessary," VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services pointed out.
For the year 2021-22, RBI has decided to put in place a secondary market G-sec acquisition programme or G-SAP 1.0. Under the programme, the RBI will commit upfront to a specific amount of open market purchases of government securities to enable a stable and orderly evolution of the yield curve.
"The bond market has taken the announcement positively with the 10-year yield moving to 6.12 percent. The governor's assurance to ensure an orderly evolution of the yield curve also is confidence-inspiring," said Vijayakumar.
Binod Modi, Head Strategy at Reliance Securities underscored that the continued emphasis towards maintaining balanced liquidity in the system by extending LTRO for six months and introducing secondary market G-sec acquisition program 1.0 certainly bodes well, which clearly reflects RBI’s commitment to sustain growth momentum in the economy.
Deepthi Mathew, Economist at Geojit Financial Services pointed out that the announcement of G-sec acquisition program 1.0 could help in the cool off in bond yields and support the government’s market borrowing program.
RBI seems to have succeeded in boosting the confidence that it will not allow liquidity crunch in the system by applying tools available to it.
"The extension of on-tap TLTRO will keep the additional liquidity window open for the lenders, which is a reassurance of sustained liquidity in the system," said Ravindra Sudhalkar, CEO at Reliance Home Finance.
RBI does not look worried about inflation also. Governor Das said that the consumer price index (CPI) inflation trajectory is likely to be subject to both upside and downside pressures.
"Food inflation will depend on the progress of the southwest monsoon and taxes on petroleum products," Das said.
RBI sees CPI inflation at 5 percent in Q4FY21 against the 5.2 percent forecast earlier. The MPC anticipates CPI inflation of 5.2 percent in Q1 and Q2 of FY22, 4.4 percent in Q3 and 5.1 percent in Q4.
RBI seems to have ticked all the boxes. However, a lot will depend on how the COVID-19 scenario develops as it will have a huge impact on the economy and corporate earnings too which will decide the course of the market.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.