RBI Monetary Policy Highlights: MPC Keeps Rates On Hold; Liquidity Absorption Stepped Up

India's Monetary Policy Committee has kept interest rates unchanged with the repo rate staying at 4%.

However, one member voted for a change in stance. By a majority of 5-1, MPC voted to maintain an accommodative stance. Is JR Varma that member? It is likely.

At this stage continuous monetary, fiscal support is required to aid the "nascent and hesitant recovery," said RBI Governor Shaktikanta Das, adding that the committee is mindful of its mandate of anchoring inflation expectations.

Watch | RBI Governor Shaktikanta Das Speaks On MPC's Decisions

Finally, the RBI closes with some easing in the operational parameters prescribed under the one-time restructuring scheme.

The deadline to meet a set of benchmarks that companies had to meet has been extended by six months, the RBI said.

Taking note of the upcoming challenging transition away from LIBOR as a benchmark, the RBI has been engaging with stakeholders. Two steps were announced.

The RBI has said that export credit in foreign currency can be issued using any other widely accepted reference rate. Second, the RBI intends to provide guidance on restructuring of derivatives linked to LIBOR. Since the change in reference rate is a force majeur, it will not be treated as restructuring, the RBI said.

Alongside monetary policy, the RBI announced a separate set of measures intended to continue support to banks and borrowers.

The on-Tap TLTRO scheme deadline has been extended by another three months till Dec.31, 2021.

The marginal standing facility relaxation given to banks last year in March has also been extended till Dec, 31, 2021. This will provide comfort to banks on liquidity availability.

While the RBI will continue to maintain liquidity support, the central bank will step up variable reverse repo rate auctions. Governor Das went to great pains to explain that stepping up of these auctions is not tantamount to monetary or liquidity tightening.

The size of the fortnightly VRRR auctions has been raised to Rs 2.5 lakh crore from Rs 2 lakh crore earlier.

This should not be read as reversal of the central bank's accommodative stance, Das said.

The MPC has raised its inflation projection for FY22 at 5.7% compared to 5.1% in the last policy.

RBI Governor Das said that the MPC decided to "look through" high inflation as most factors driving price pressures as seen as "exogenous and temporary".

Any action to curb inflation now could kill the "nascent and hesitant recovery," Das said. He added that while inflation may remain close to upper tolerance band in Q2 but should ebb in Q3.

Even as inflation remains above the MPC's target, Governor Das' statement remained focused on growth.

All support is needed to support the "nascent and hesitant recovery", Das said.

Domestic economic activity has started normalising, said RBI governor. High-frequency indicators suggest that private and government consumption, investment, external demand are all on path of regaining traction. he said.

RBI has maintained its forecast for 9.5% real GDP growth in FY22.

India's Monetary Policy Committee met for the third time this financial year in the week. Its decision is due on Friday.

All 21 economists polled by Bloomberg expect the MPC to vote for a status quo on rates.

The benchmark repo rate, set by the MPC, has been at 4% since May 2020. This is the longest the repo rate has remained unchanged over the past two decades at least. The reverse repo rate, set by the Reserve Bank of India, is currently at 3.35%

With growth just about recovering from the impact of the second wave of Covid infections, the MPC will likely say it's soon to raise rates or change its accommodative stance.

Inflation at 6.26% in June remained above the MPC's target range of 4(+/-2)% for the second straight month, though it's expected to ease from here on.

Economists expect the MPC to raise its inflation forecast for FY22 marginally higher from the current 5.1% but this may not impact the direction of policy.

"We think the RBI will push up its inflation forecast by around 20 basis points for the year," Yes Bank Chief Economist Indranil Pan said in a note. "However, this is unlikely to impact its reaction function as the RBI will continue to point towards 'transitory' reasons of supply constraints for inflation remaining firm."

The RBI's unlikely to make any changes to its liquidity policy. At the last meeting in June, the central bank had announced Rs 1.2 lakh crore in bond purchases under its G-SAP bond purchase plan for the quarter ended September. These purchases are still underway.

Bond yields, however, have risen by about 20 basis points between the June and August policies, with the 10-year yield now close to 6.20%.

Banks have been parking between Rs 5-6 lakh crore with the RBI as liquidity conditions remain in surplus. Government cash balances with the central bank are also high. In such a scenario, the central bank could look to step up variable rate reverse repo operations, said Kaushik Das, chief India economist at Deutsche Bank. "We don’t think an additional increase in VRRR will pose any risk to the ongoing growth recovery."