Monetary Policy Updates: MPC Keeps Rates Unchanged; RBI To Hold OMOs In State Development Loans

Saugata Bhattacharya, Chief Economist, Axis Bank

• The growth estimate helps guide future policy action
• We also have a clearer sense of direction with regard to inflation
• Don’t see further scope for repo rate cuts
• The amount of additional measures in the policy are reaching ECB levels
• Non-disruptive evolution of the bond market has been a constant theme
• The RBI seems to be very serious about spending money to push growth higher
• Would not need statutory legislative change for RBI to conduct OMOs in SDLs

Arvind Chari, Head- Fixed Income, Quantum Advisors

• For the bond market, this is like Christmas came early
• Everything that the bond market has asked for, the RBI Governor has delivered
• Expect bond yields to head down after this
• The increase in the quantum of the OMO is something the market had asked for
• Found the TLTRO, HTM measures very significant for the bond market
• The RBI’s announcement of OMOs in SDLs should reduce the spread of yields over GSECs
• The RBI has been listening to the markets and tried to address dysfunctions
• Today’s was a very big commitment to the market by the RBI
• Market keeps expecting more every time there is an impact

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

• GDP and inflation forecasts welcome, in-line with market expectations
• No interest rate cut coming in December
• Growth, demand conditions will indicate if rate cut necessary in February
• Whether policy rate should be lowered in February, or if fiscal policy should be driving force remains to be seen

• To conduct OMO in SDLs as a special case this year.
• Should expel liquidity concerns regarding SDLs.

Consumer Price Index inflation will remain elevated in the September print and ease gradually in Q3 and Q3, Das said.

• Supply disruptions and associated margins and mark-ups are major factors driving inflation.
• As supply chains are restored, these wedges should dissipate.

• Announcing an on-tap TLTRO with tenors of upto three years with total amount of Rs 1 lakh crore at a floating rate linked to repo rate.
• Amount and period to be enhanced after review.
• Liquidity availed under this scheme can be used to provide bank loans toward this sector.
• In order to provide certainty to banks, RBI to extend dispensation on enhanced limits of SLR securities under HTM category to March 31, 2022.

• Since Feb 2020, the RBI has taken a series of measures and is ready to take further measures to assure participants about market stability and liquidity availability.
• Limit for WMA for the centre has been kept at Rs 1.25 lakh crore, compared with Rs 35,000 crore in the second half of last year.
• Size of OMO auction will be kept at Rs 20,000 crore, expect market participants to respond positively.
• Augmented borrowing programme this year has been necessitated due to the pandemic and the associated fiscal spending and reduction in tax revenue
• Market participants on their part need to take a broader time perspective and display it in their bidding behaviour
• It takes at least two views to make a market, but these views can be competitive without being combative.

FY21 real GDP expected to contract by 9.5%, with risks tilted to the downside, the RBI governor said.

• Improvement in agri and allied activities would boost revival
• Private investment and exports are likely to be subdued
• If the current momentum of upturn remains strong, we can expect a strong rebound in growth

• Investment has remained in retrenchment while consumption and exports have started to improve.
• Financial conditions continue to remain benign.
• Deep contractions of Q1 FY21 are behind us
• Barring an incidence of a second wave, India is likely to shrug off impact of the virus as move towards its pre-Covid growth trajectory.
• Migrant labour is starting to return to urban areas, factories are restarting operations
• It is visible in energy consumption and movement of population
• Mood of nation has changed to confidence and hope
• Projections indicate that inflation will ease closer to target by Q4FY21
• GDP growth may break out of contraction and change to positive by Q4

The MPC unanimously decided to leave the repo rate unchanged at 4% and to continue with its accommodative stance as long as necessary - “at least through the current financial year and into the next year to revive growth on a sustainable basis and to mitigate the risks of Covid-19 while ensuring that inflation remains within the target,” Governor Shaktikanta Das said today.

Reverse repo rate stands unchanged at 3.35%.

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Growth Forecast

The central bank will likely publish growth forecasts for the current fiscal, providing the first official estimate of an economy that’s being hit harder than most major nations in this pandemic. Gross domestic product shrunk by a record 23.9% over a year ago in the quarter ended June, and economists surveyed by Bloomberg predict an 8% contraction for the year through March 2021.

Inflation Forecast

The RBI’s consumer price inflation forecasts will be closely watched, given that inflation is sitting well above the 4% mid-point of the central bank’s 2-6% target band. Economists surveyed by Bloomberg are forecasting inflation of 5.5% in the year to March.

The RBI has not provided growth or inflation forecasts since the Covid crisis broke out. It is mandated to give an inflation forecast every six months in the Monetary Policy Report, due to be released with the policy this time.

Other Tools

Policymakers could turn to more unconventional steps like open market bond purchases and the RBI’s own version of yield curve control to keep borrowing costs in check and ensure better transmission of policy rate cuts to the banking system.

Reserve Bank of India Governor Shaktikanta Das is set to announce the Monetary Policy Committee’s decision taken in a bi-monthly meeting at a time the country is struggling not just to control supply-side inflation, but also low growth.

The governor will announce the decision over a video conference via social media.

The newly-constituted MPC began its three-day deliberations on Wednesday, amid expectations that the central bank will maintain status quo on the benchmark policy rates in view of hardening inflation. Earlier slated for Sept. 29 to Oct. 1, the meet was rescheduled as the appointment of independent members was delayed. The MPC must have a quorum of four.

Rate Cut Unlikely

The Monetary Policy Committee is set to maintain the benchmark repurchase rate at 4% Friday, according to all 24 economists surveyed by Bloomberg.

After its last MPC meeting in August, the MPC had kept interest rates unchanged as it sought more clarity on the outlook for inflation, even though it said the economy is extremely weak. The RBI has cut interest rates by 115 basis points since February when the Covid-19 crisis hit India.

Governor Das had said although there was headroom for further monetary policy action, it was important to keep "our arsenal dry and use it judiciously".