In the last few months, the US Federal Reserve and the RBI have been consistently assuring the markets that rates would be held low and monetary stance would be accommodative. However, in the US and in India, the bond market yields have been moving up consistently. That is a fairly anomalous monetary situation. Even in the April policy, the Monetary Policy Committee (MPC) has assured that rates would be kept low and the stance accommodative till growth impulses are back.
Gist of the April 2021 Monetary Policy announcement
· The repo rates were maintained at 4% and the derived reverse repo rate at 3.35% with assurance from the MPC to keep rates low as long as required.
· Consequently, the bank rate and MSF rate which are pegged at 25 bps spread premium to the repo rate, stayed put at 4.25%.
· MPC reiterated its accommodative monetary stance, principally to offset the COVID-II impact. MPC has also committed to maintaining this stance through FY22.
· MPC revised its outlook for FY21 headline inflation lower from 5.2% to 5.0% but warned of distinct inflation risks in the current fiscal.
· Despite World Bank and IMF upgrading India’s GDP growth to 12%, the RBI chose to hold GDP estimates for FY22 at 10.5% to factor in COVID-II repercussions.
· All the 6 MPC members voted unanimously to hold repo rates at 4% and also keep the monetary stance accommodative. The caveat was that inflation remains under 6%.
GDP growth could be impacted by COVID-II syndrome
“Urban demand gained strength on normalization of economic activity and will get a boost with the ongoing vaccination drive. The fiscal boost from increased CAPEX allocation in Budget 2021-22, expanded PLI scheme and rising capacity utilization at 66.6% calls for the supportive easy-money ecosystem to boost growth” (RBI Policy Extract)
Globally, the resurgence of COVID curtailed some of the multiplier benefits of the $10 trillion stimuli. Across Europe and large swathes of the US, lockdowns are expected to put pressure on global growth. IMF continues to be positive that global growth estimates of 4-4.5% would not be impacted by COVID-II, but that is still a debatable issue.
The National Statistical Office (NSO) pegged FY21 GDP contraction for India at -8.0%; 50 bps lower due to COVID resurgence. High-frequency indicators like vehicle sales, railway freight, GST collections, e-way bills, and steel consumption are robust, so there could still be a positive surprise. For FY22, GDP growth is estimated at 10.5% with GDP estimated to grow 26.2% in Q1, 8.3% in Q2, 5.4% in Q3, and 6.2% in Q4.
Don’t ignore inflation tail risks, says RBI
“Reduction of excise duties, cess, and state-level taxes on petrol and diesel can provide relief from higher international crude prices. The impact of high international commodity prices and increased logistics costs is being felt across manufacturing and services. Reduction in levies can surely help curb cost-push inflation” (RBI Policy Extract)
While COVID-II remains the risk to GDP, the inflation matrix could be more complex. Demand-pull may be moderate, but MPC expects supply-side pressures to persist. One way to control supply-side inflation would be to cut levies on inputs like petrol and diesel, although it is doubtful in the face of budgetary pressures. The inflation outlook has been tempered from 5.2% to 5.0% for Q4-FY21, 5.2% for Jun-21 and Sep-21 quarters, and 4.4% and 5.1% for the last 2 quarters of FY22.
The sharp spike in commodity prices globally resulted in a spike in industrial inflation, which is seen in rising WPI. Despite COVID-II lockdowns denting demand, the supply-side pressures could actually be the X-factor for inflation.
What else the RBI said in the Monetary Policy Statement
RBI announced some key policy changes on the subject of supervision, debt management, and payment systems. Here is a quick take.
· The TLTRO on-tap liquidity scheme has been extended from March 31, 2021, to 30 September 2021 to help RBI better tweak yield curve anomalies.
· Maximum end-of-day balance limit for accounts in Payment Banks enhanced from Rs1 lakh to Rs2 lakh for individual account holders.
· The bank priority sector on-lending scheme via NBFCs also stands extended from 31 March 2021 to 30 September 2021.
· To help stated deal with liquidity shortfalls, the limit for ways-and-means advances (WMA) for all states enhanced by 45% to Rs.47,010 crore.
· RBI to construct and publish the Financial Inclusion Index on a periodic basis to measure and benchmark the extent of financial inclusion in India.
· Now, apart from banks, even PPI issuers, card networks, and white label ATM operators will be allowed to offer NEFT/RTGS services
· RBI to permit cash withdrawal from non-bank full-KYC PPIs to in Tier-3 and Tier-4 cities for better digital facilitation.
The theme of the policy is that RBI stays accommodative but this could change rapidly if supply-side factors put pressure on inflation. The detailed minutes of the MPC meeting will be out on 22-Apr, and that will set the tone for the next monetary policy on 04-June.
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