RBI Governor Shaktikanta Das: MPC Keeps Policy Rates Unchanged, Stays Accommodative

Global stimulus spillovers impact asset prices and financial markets, which we take into account before making decisions, RBI Deputy Governor Patra said.

• In the MPC's assessment, spillover of global monetary actions is the second biggest source of risk for India, after the rise in Covid infections
• Spillover can impact India both positively and negatively
• If U.S. stimulus spills over, then we may have a problem of high capital flows
• We could have the opposite problem of capital flight as well

At the current juncture, growth is of paramount importance, while keeping in mind inflation targetting, the RBI Governor said.

• 4% inflation target is well entrenched
• Tolerance band allows room to act in extraordinary circumstances
• Growth is of paramount importance at the current juncture
• We will study how it plays out in the future

According to the RBI’s assessment, core inflation has been disrupted due to pandemic related issues rather than supply side problems, Deputy Governor Michael Patra said, adding that, “On the repo rate, all options are available to us on the table.”

The secondary market G-Sec Acquisition Programme is different to the RBI’s usual open market operations and will run in addition to the other liquidity measures taken by the central bank, Governor Das said.

Deputy Governor Michael Patra added that unlike OMOs, where the RBI uses its discretion, the G-SAP will give explicit assurance on the amount of bond purchase from the secondary market. This would also allow market participants to plan their engagement with the borrowing programme.

However, the RBI is not committing to completely give up the option of rejecting bids. “Since RBI is managing conflicting targets, we have to find the right balance,” Das said adding that the central bank will take a call based on whether there is an orderly bid or a complete outlier.

It is a challenging instrument because it can go awry, Patra admitted, but this is a risk the RBI has taken, given its commitment to the management of liquidity.

“The programme will ensure that there is an orderly evolution of yield curve and financial markets as well,” Das said.

RBI will continue to do “whatever it takes” to preserve financial stability, RBI Governor Shaktikanta Das said.

• Will continue to insulate financial markets from global spillovers.
• Urge market participants to take heed of actions, communications in balanced manner.

The Reserve Bank of India has decided to accept the recommendations of an advisory committee that reviewed ways and means advance limits to states and union territories. The aggregate ways and means advance limit of all states and UTs will be enhanced to Rs 47,010 crore, an increase of 46%.

• RBI to provide liquidity support of Rs 50,000 crore to all-India financial institutions.
• RBI enhances the maximum end-of-day balance limit for payment banks from Rs 1 lakh/individual to Rs 2 lakh with immediate effect.
• The central bank proposed to constitute a committee to comprehensively review the functioning of asset reconstruction companies.
• RTGS and NEFT membership to be allowed for non-bank payment institutions.
• RBI proposed to make interoperability of full-KYC prepaid payment instruments mandatory.
• Proposal to enhance outstanding deposits in full KYC PPIs from Rs 1 lakh to Rs 2 lakh.

RBI extended the deadline for TLTRO on-tap liquidity scheme to September 30, 2021 from March 31.

In view of success of variable reverse repo rate auctions, RBI has also decided to conduct such auctions of longer tenors, the Governor said. “The amount and tenor of these auctions will be decided later.”

RBI has decided to put in place a secondary market G-sec acquisition programme, RBI Governor Shaktikanta Das said.

• RBI will commit to purchase a definite amount of government securities.
• Endeavour will be to sustain congenial financing conditions.
• Has been decided to announce a G-SAP of Rs 1 lakh crore in Q1FY22

The projection for CPI inflation has been revised to 5% in Q4 of financial year 2020-21, 5% in Q1 FY22, 5.2% in Q2, 4.4% in Q3 and 5.1% in Q4 with risks broadly balanced, said RBI Governor Shaktikanta Das.

• Underlying constituents of CPI inflation are testing the upper tolerance level
• Food inflation trajectory will critically depend on temporal and spatial progress of South-West Monsoon
• Some respite from incidence of domestic taxes on petroleum products through coordinated action could provide relief.
• Combination of international commodity prices and logistics costs may push up input price pressures.

The Reserve Bank Of India maintained the FY22 real GDP growth projection at 10.5%, however, RBI Governor Shaktikanta Das warned that the recent surge in Covid-19 infections has given greater uncertainty on growth outlook.

• For domestic economy, focus must now be on containing spread of virus, and economic revival.
• Need to consolidate gains made so far, sustain impulses of growth in FY22.
• Strengthening bedrock of macro stability will help stakeholders take efficient spending decisions
• Economic activity is normalising in spite of surge in Covid-19 infections.
• Firms engaged in manufacturing, services and infrastructure polled by RBI in March are optimistic about the pick-up in demand and expansion in business activity in FY22.
• Urban demand has gained traction and should get fillip from recent vaccination drive.
• In India we are now better prepared to face challenges from recent resurgence of infections.

CPI inflation trajectory likely to be subject to both upside and downside pressures, RBI Governor Shaktikanta Das said.

• Since last meeting, inflation firmed up to 5% due to adverse base effect.
• Underlying inflation pressures emanate from high global commodity prices and logistics costs.
• Mitigation of price pressures on key food items would depend on supply side measures and easing of international prices.

The Monetary Policy Committee voted to leave policy repo rate unchanged at 4% and maintained an accommodative stance in a unanimous vote. The panel guided towards an extended pause till the economic recovery is “well secured.”

The reverse repo rate too was kept unchanged at 3.35%.

All of the 30 economists polled by Bloomberg expected the central bank to maintain a status quo.

While the MPC is unlikely to change interest rates, the committee’s guidance will be closely watched.

In the wake of the Covid-19 crisis, the MPC gave explicit time-bound guidance.

“The MPC also decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward,” the resolution after the February meet said.

With the financial year underway, markets are waiting to see whether the time-bound is extended.

In addition, the MPC’s commentary on downside risks emerging from the second wave of Covid infections is awaited. Economists, however, believe that it is too early for the central bank to review its FY22 growth forecast of 10.5% growth.

Bond markets will also await any further signals of normalisation of monetary and liquidity policies. After the reversal of the 100 basis point cash reserve ratio cut, the RBI may look to raise the reverse repo rate. However, most believe it is too soon for that.

India’s Monetary Policy Committee is meeting for the first time this financial year, at a time the second wave of the Covid-19 pandemic threatens to destabilise the country’s economic recovery. The meet also comes days after the government decided to keep the central bank’s inflation target for the next five years unchanged at 4 (+/-2)%.

Stuck between growth risks emerging out of renewed lockdowns and elevated inflation, the policy panel is likely to take the ‘do-nothing’ option this week.

All of the 30 economists polled by Bloomberg expect the MPC to maintain a status quo. The policy repo rate is currently at 4%, while the reverse repo rate is at 3.35%.

Reserve Bank of India Governor Shaktikanta Das is set to announce the policy decision at 10 a.m. today, followed by a press conference at 12 p.m.