Resilience, Confidence & Revival
Key Takeaways from the RBI Monetary Policy Committee Report
Right off the bat, RBI’s Monetary Policy Committee has decided to maintain status quo. Repo and Reverse repo held steady at 4% and 3.35% respectively. The committee’s stance continues to be accommodative. The tone of the Governor’s speech reflects confidence in the ability to moderate inflationary pressures within target region while policies will continue to foster broader economic growth. While the policy rate decision was unanimous, the stance was voted for with 5 votes for versus 1 against.
The Governor reassured that RBI is committed to economic growth and it will be guided by principles of gradualness and refrain from suddenness or surprises in actions.
Notably, Q2FY22 CPI was reported at levels lower than broader consensus – this has been well received as a positive surprise. However, core inflation has been noted to continue its sticky nature. RBI moderated FY22 CPI expectations to 5.3% against previous 5.7%. Q3FY22 inflation is projected at 4.5% and Q4FY22 is pegged at 5.8% with risks broadly balanced. Efforts in direction of reversal of fuel taxes may augur well in the Central Bank’s quest to soften inflationary pressures.
Quite in line with expectations, high frequency indicators have already started gaining momentum. Pent-up consumer demand buoyed by festive exuberance along with boost in imports specifically in the capital goods segment would be key drivers in expansion of economic recovery trajectory.
The Monetary Policy Committee retains GDP growth forecast of 9.5%. It is worth noting that as recent as yesterday, Fitch Ratings trimmed India’s FY22 GDP forecast to 8.7% whereas World Bank pegged it at a more conservative 8.3%. RBI’s Q2FY22 GDP projection has moved north to 7.9% versus previous estimate of 7.3% for the quarter.
In terms of actions and measures, RBI has committed to readiness to undertake GSAP as and when required. However, given the liquidity overhang and absence for fresh government borrowing for GST compensation, bond purchases via the GSAP route may not be necessary. While the market appetite for 14-day VRRR is promising, the same is expected to complement the 28-day VRRR. The fortnightly VRRR is expected to step up from INR 4 Trillion to INR 6 Trillion. Liquidity to be absorbed in the first week of December 2021 under fixed rate auction is pegged to a ballpark of INR 2 Trillion to INR 3 Trillion. The Governor specifically asserted that VRRR’s must not be interpreted as a reversal in stance.
The calendar for fortnightly VRRRs is expected to look like the following:
| 08 October 2021 | INR 4 Trillion |
| 24 October 2021 | INR 4.5 Trillion |
| 03 November 2021 | INR 5 Trillion |
| 18 November 2021 | INR 5.5 Trillion |
| 03 December 2021 | INR 6 Trillion |
The RBI Governor also announced a slew of segment and transaction-specific initiatives, the effects of which can be expected to positively amplify and impact the country state of financial affairs.
The Governor announced that IMPS transaction limit will be upped from current INR 2 Lakhs to INR 5 Lakhs. The SLTR auctions for small finance banks are expected to continue beyond the original deadline of October 2021 to December 2021. All new payment acceptance infrastructure including PoS machines and QR codes will be geo- tagged.
Fisdom Research’s Take on the Episode:
The RBI Governor’s concluding remark explaining RBI’s stance on liquidity – “We don’t want to rock the boat when the shore is near as there is a journey beyond the shores” perfectly sums the situation and our expectation from the central bank.
Though unchanged policy rates were broadly expected, the underlying tonality of the Governor’s address reflected confidence and revival. We believe that improving economic conditions, resolution of disrupted supply chain- induced inflation and coordinated commitment to economic growth by the Central Bank and Administration will pave a healthy path towards a fuller economic recovery.
Most nations across the globe have started transitioning into a tighter monetary policy regime, closer inspection would reveal that most of these economies are either reeling under immense inflationary pressure or have fully entered the zone of economic expansion, or perhaps both. While the typical expectation is that India will take cues from global counterparts, a deeper understanding of the Central Bank’s policies, especially since March 2020, would reflect the nuanced distinction between ‘taking cues’ and ‘reacting impulsively’. We are confident that the Central Bank recognises global developments but continues to hold its own when it comes to calibrating policies back home.
We expect the Central Bank to continue working on developmental agendas while supporting growth objectives and that it will take significant economic development/s to warrant a change in policy or stance.
*****
