There was never any doubt that the RBI would maintain status quo on rates in the October 2021 policy. That was obvious from the language of the RBI in recent weeks. The only counter view had been raised by Citi in a report that the RBI could hike the reverse repo rates by 15-20 basis points. That was a point that Jayanth Varma had made in the August policy suggesting that hiking the reverse repo rates would close the 65 bps gap with repo rates and also act as an alternative to repo rate hike. However, RBI kept status quo.
There were larger macro risks that the RBI had to contend with. The Evergrande crisis was threatening to snowball in China and had already started spreading to other realty companies. The risk of a hard landing in China plus weakening of the Yuan looked realistic possibilities. Then there was the bigger risk of higher US inflation. That was pushing up bond yields in the US and also in India. Above all, the RBI had to ensure that the nascent recovery of the Indian economy was not impacted negatively, especially after COVID 2.0.
Major features of the Oct-21 Monetary Policy announcement
- RBI held the repo rate at 4%; virtually underlining the RBI’s commitment to keep rates low till durable growth came back in a substantive way.
- RBI desisted from hiking reverse repo rates and held it at the level of 3.35%. It was suggested even by MPC member, Dr. Varma as a compromise solution.
- The spread-benchmarked bank rate and Marginal Standing Facility (MSF) rate stayed at 4.25%, but improved transmission was already working to push down costs.
- The MPC voted unanimously for holding the repo rates at 4% and voted in the ratio of 5:1 in favour of sustaining the accommodative stance of the policy for now.
- GDP growth estimates for fiscal year 2021-22 was held at 9.5% but CPI inflation target for FY22 was cut by 40 bps from 5.7% to 5.3%.
- The policy noted in its review that monsoons for the year had been adequate, albeit delayed, promising a robust Kharif and Rabi output this year to keep inflation in check.
- While inflation has been cut by 40 bps in this policy, it had been hiked 60 bps in Aug-21.
Delayed monsoons add to the growth worries
“Domestic economic activity is gaining traction with ebbing of second wave. Rural demand is likely to maintain buoyancy, given above normal kharif sowing and bright rabi prospects. The acceleration in pace of vaccination, sustained lowering of new infections and the coming festive season will support a rebound in demand” (RBI Policy Extract)
Compared to the scepticism expressed by the RBI in Aug-21 policy, this time the tone is a lot more optimistic that macros were working in fine fettle. However, the RBI has also added that while the optimism was there, there was still not much of a base case for any rate hikes as the heating of economy still looked quite far away.
The RBI policy points out that while the PMI manufacturing and other high frequency data plots like GST collections, e-way bills and freight data were positive, it would still predicate on the vaccination program. That is why the RBI has used the term “durable recovery in growth” as the clause for any repo rate decision on the upside.
What the RBI has also done is to front-end some of its growth estimates as the recovery from COVID 2.0 has been quicker than estimated. For FY22, GDP growth estimates have been held at 9.5%. GDP is estimated to grow 7.9% (Q2), 6.8% (Q3), 6.1% (Q4) and 17.2% (Q1-FY23). Clearly, COVID 2.0 was managed a lot better
In short, the decisive variable will still be “durable growth” as the big condition for monetary policy shifts. The good news is that inflation cut has been front ended by the RBI. Inflation outlook was cut for FY22 to 5.3%. RBI projected inflation at 5.1% in Q2, 4.5% in Q3, 5.8% in Q4 and 5.2% in Q1-FY23.
Major policy action points announced by RBI
Key policy changes and tweaks were announced by the RBI, more from a customer utility perspective.
- On-tap LTRO scheme of Rs10,000cr for SFBs extended from Oct-21 to Dec-21. SFBs play an important role in last-mile credit delivery.
- RBI to allow digital transaction in offline mode for broader reach. In addition, RBI also enhanced IMPS transfer limit from Rs2 lakhs to Rs5 lakhs.
- Enhanced limits of WMA for states and UTs of Rs51,560cr extended from 30-Sep-2021 till 31-Mar-2022 to address liquidity shortfalls.
- An Internal Ombudsman Service for NBFCs on the lines of banks. This is to empower NBFCs to effectively handle and review customer grievances.
It looks like the RBI is not keen to unsettle the applecart by giving indications of hawkishness at this point. Jayanth Varma is the only MPC member who is sceptical about the upper inflation limit and the accommodation promise, and rightly so. For now, the hints for the stock market are a lot more positive.
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