RBI Monetary Policy: Rates On Hold, RBI Takes Baby Steps Towards Liquidity Normalisation
India’s six-member Monetary Policy Committee kept interest rates unchanged for the eighth consecutive meet.
Following its fourth review of the current financial year, the MPC voted unanimously to keep the policy repo rate unchanged at 4%.
The reverse repo rate, set by the Reserve Bank of India, was unchanged at 3.35%.
The stance remained accommodative. Five members voted in favour, while Jayanth R. Varma voted for a change.
The MPC also decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.Monetary Policy Resolution
The repo rate was last reduced in May 2020, making this the longest stretch of status quo in the benchmark policy rate over at least the last 20 years.
All the 33 economists polled by Bloomberg expected the central bank to maintain a status quo on rates.
Against the backdrop of a large liquidity surplus, the central bank decided that:
The need for undertaking further G-SAP operations does not arise at this juncture. Given the liquidity overhang and the absence of fresh government borrowing for GST compensation means that these bond purchases are not necessary, Das said.
The RBI has also stepped up the pace of variable rate reverse repo auctions. It will conduct variable rate reverse repo auctions on a fortnightly basis of up to Rs 4 lakh crore today, Rs 4.5 lakh crore on Oct. 24, Rs 5 lakh crore on Nov. 3, Rs 5.5 lakh crore on Nov. 18, and Rs 6 lakh crore on Dec. 3.
Further, depending upon the evolving liquidity conditions—especially the quantum of capital flows, pace of government expenditure and credit offtake—the RBI may also consider complementing the 14-day VRRR auctions with 28-day VRRR auctions in a similar calibrated fashion.Shaktikanta Das, Governor, RBI
The measures should not be seen a reversal of the accommodative policy stance, Das said. "The RBI will ensure that there is adequate liquidity to support the process of economic recovery. The Reserve Bank will continue to support the market in ensuring an orderly completion of the borrowing programme of the Government. Further, our focus on orderly evolution of the yield curve as a public good also continues", he said.
It will have to be non-disruptive while supporting recovery, Das said.
We don't want to rock the boat when the shore is near as there is a journey beyond the shores.Shaktikanta Das, Governor, RBI
Domestic economic activity is gaining traction with the ebbing of the second wave. Going forward, rural demand is likely to maintain its buoyancy, given the above-normal kharif sowing while rabi prospects are bright.
The substantial acceleration in the pace of vaccination, the sustained lowering of new infections and the coming festival season should support a rebound in the pent-up demand for contact-intensive services, strengthen the demand for non-contact-intensive services, and bolster urban demand.
Global semiconductor shortages, elevated commodity prices and input costs, and potential global financial market volatility are key downside risks to domestic growth prospects, along with uncertainty around the future
Taking all these factors into consideration, projection for real GDP growth is retained at 9.5% in FY22 consisting of 7.9% in Q2, 6.8% in Q3, and 6.1% in Q4. Real GDP growth for Q1 in FY23 is projected at 17.2%.Monetary Policy Statement
CPI inflation in August was lower than anticipated but core inflation remains sticky and the evolving situation requires close vigilance.
Going forward, the inflation trajectory is set to edge down during Q3FY22, drawing comfort from the recent catch-up in kharif sowing and likely record production.
Pressures persist from crude oil prices which remain volatile over uncertainties on the global supply-and-demand conditions. Domestic pump prices remain at very high levels. Rising metals and energy prices, acute shortage of key industrial components and high logistics costs are adding to input cost pressures. Weak demand conditions, however, are tempering the pass-through to output prices.
The CPI headline momentum is moderating with the easing of food prices which, combined with favourable base effects, could bring about a substantial softening in inflation in the near term.
Taking into consideration all these factors, CPI inflation is now projected at 5.3% during FY22: 5.1% in Q2, 4.5% in Q3, and 5.8% in Q4 of FY22, with risks broadly balanced. CPI inflation for Q1FY23 is projected at 5.2%.Monetary Policy Statement
Liquidity Normalisation In Progress
“Don’t rock the boat, but swing the rudder” – seems to have been the RBI’s mantra in this policy meeting, said Aurodeep Nandi, India economist and vice-president at Nomura. The announcement of a complete tapering off of the RBI’s quantitative easing programme, coupled with an expansion of the scope of the VRRR operations, is a clear sign that liquidity normalisation is now on the offing, he said.
According to Suvodeep Rakshit, senior economist at Kotak Institutional Equities, even as the RBI increased the quantum under the 14-day VRRR auctions and opened the option of 28-day VRRR auctions, it adequately sounded out on its dovishness and the need to ensure that liquidity conditions remain comfortable. “We do not see the RBI in a hurry to normalise liquidity conditions as well as the reverse repo rate in the near term.”
While the cyclical growth recovery is ongoing, Nandi said upside risks to inflation have further risen, especially with the latest surge in commodity prices. “Consequently, the next bend on the policy road will be a reverse repo rate hike to normalise the policy corridor, and then a pivot towards rate hikes in 2022.”