The Reserve Bank of India MPC has decided to keep rates policy/liquidity stance unchanged. This doesn’t come as a surprise as the statement does aim at addressing the key concerns and questions which had been weighing on the market sentiments.
The MPC has prioritised growth even with the risk of inflation. The assurance of policy support for growth was much needed in the current environment because uncertainties are increasing amidst the rapid increase in covid infections and the possibility of lockdown restrictions in key states, which contribute nearly 30% to overall GDP. Any failure to break the covid infection chain can result in significant risk to broad-based growth and macro stability. For now, we can retain our GDP growth estimate for FY22 at 10.5%, with risks equally balanced depending on the pace of the vaccination drive, because of uncertainties the MPC has dropped the time-based guidance and instead focused on growth revival on a sustainable basis keeping in mind the objective of inflation signalling that any actions going ahead will be contingent on data. The decision to conduct VRRR auctions (Variable rate reverse repo) of longer maturity should put pressure on the shorter end of the curve but is not expected to shift the overnight rates beyond the reverse repo rate of 3.35% probably through CY2021. the surprise decision by the RBI to announce an OMO calendar of Rs 1 lakh crore in 1QFY22 under the G-sec acquisition programme is a big positive for Gsecs.10-yr yield may now be in the 6-6.20% range in 1QFY22. While the near term policy support has been provided, the inflation risks may remain quite real which may restrict the sustainability of aggressive policy support beyond the near term. Moreover, the rising global yields may provide a floor to the domestic yields.
