With the CPI inflation moving up in recent months, the RBI has held the policy repo rate unchanged at 4 percent. The move has been on expected lines, as high inflation in the near period leading to negative real rates had limited the RBI’s scope for further rate cuts.
The central bank has already decreased the repo rate by a total of 115 basis points since February, on top of the 135 basis points in an easing cycle last year, from 6.50 percent. RBI answered the common dilemma of ” to cut or not to cut” with a clear no cut announcement. The Central bank is concerned about the inflation which it feels has risk on the upside. This is the reason why there is a pause in policy rates and accommodative stance. The RBI Governor says that the disconnect between the financial market and the real economy is a reflection of the central bank’s concern about the exhilaration in the market. The central bank has chosen to play it safe with a pause even while repeating that further space is available for more monetary action.
Upasna Bhardwaj, Kotak Mahindra Bank
MPCs’ caution on uncertainty on the inflation path suggests that chances of further easing will henceforth remain a function clearly of evolution of supply-side shocks. It is still raised near to 6% and hence we do not see any rate easing in at least the October meeting.
Amar Ambani, YES Securities
RBI’s MPC solidly held the status quo on rates. Current rates in the system are gentle enough to allow for a pause. Cumulative rate cuts since February 2019 were also accompanied by sharper cuts in reverse repo as well as lowered levels of CRR in earlier policy announcements. As the US Fed kept rates unchanged, it enabled them to retain the rates at current levels, which also helps lure foreign capital. The pause permitted RBI an opportunity to monitor upside risks to food inflation and cost-push pressures from the rise in fuel prices. More importantly, the RBI Governor addressed liquidity concerns in the Covid19 crisis for housing, MSMEs, the flow of credit in corporate bond markets, and facilitating an improved platform and system for banks.
Deepthi Mary Mathew, Geojit Financial Services
RBI acted cautiously by keeping the rates unchanged. The surplus liquidity in the banking sector and expectation of inflation rate to remain at the raised levels in Quarter2 of 2021 guided RBI’s decision. One of the most important announcements was concerning raising LTV for gold from 75 percent to 90 percent. This would be helpful to the Indian households in the wake of rising gold prices.
Shanti Ekambaram, Kotak Mahindra Bank
This pause would give the MPC the choice of effecting future rate cuts when inflation falls and based on how the economy progresses. The MPC has also kept its accommodative stance. The restructuring scheme for the MSME sector will cater to additional relief to a sector deeply impacted by Covid-19.
Kumaresh Ramakrishnan, PGIM India Mutual Fund
Post-RBI policy, action for markets should currently shift back to Open market operations, to soak the huge issuance volumes pending for the remainder of the year. A Combination of liquidity and OMOs should support the front end and long end of the curve in a narrow band.
