Rate cut takes a pause

Mumbai: As it was expected, the RBI has maintained its accommodative stance on its annual monetary policy during the bimonthly policy review on conclusion of three-day MPC meeting this morning. With the MPC forecasting the CPI inflation to average around 5.0 per cent in FY2022, rate cuts seem to be ruled out, unless economic activity is severely disrupted by the ongoing wave of Covid-19. RBI Governor Shaktikanta Das said that MPC voted to keep repo rate unchanged at 4 per cent and MPC voted to keep accommodative stance on key policy rates.

RBI governor said that food inflation trajectory will depend on monsoon. Moreover, he maintained that real GDP growth seen at 10.5 per cent in FY22. Bankers have welcomed the accommodative stance as maintained by the RBI in its policy today.

"Policy announcement represents a balanced approach to make economic revival deep rooted, ensure orderly development of financial market and keep price movement at manageable levels," said AK Das, Managing Director & CEO, Bank of India.

Analysts believe that there was no likelihood of rate hike in near future. "Early rate hikes appear extremely unlikely, with inflation expected to remain below the 6 per cent upper threshold of the MPC's newly renewed medium-term target range.

Therefore, we maintain our view of an extended pause in the repo rate through 2021, with a low likelihood of an upward revision in the reverse repo rate over the next two quarters," says Aditi Nayar, principal economist, ICRA. By committing to continue the accommodative stance for as long as necessary to durably sustain growth, without providing any explicit timeframe, the MPC has clearly indicated that it will remain data dependent, going forward. While we anticipate that the MPC will take cues from the evolving scenario related to Covid-19 infections, mutations, and vaccinations, as well as their impact on localised restrictions, sentiment and growth, we expect it to remain suitably cautious, and continue the accommodative stance during H1 FY2022, she said.

As per ICRA, our forecasts peg the expansion in Indian GDP and the Gross Value Added (GVA; at constant 2011-12 prices) in FY2022 in a range of 10-11 per cent, benefitting from a normalisation in economic activity after the vaccine rollout widens, as well as the low base. However, the surge in Covid-19 cases and re-imposition of localised restrictions has reignited uncertainty related to the near-term outlook, which is expected to persist until after all adults in India become eligible for the Covid-19 vaccines. In our view, the pace of growth in H1 FY2022 is now likely to be somewhat lower than our earlier forecasts. However, demand may get back-ended into H2 FY2022, boosting growth in that period relative to our earlier projections.

Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund said, "The RBI MPC voted for a status quo in line with our and market expectations. The move to introduce G-SAP – secondary market GSec acquisition program is a master stroke by the RBI. This would reign in sharp spike in GSec bond yields. Introduction of long term VRRR (variable rate reverse repo) is an extension towards normalising liquidity. Liquidity surplus however will and is likely continue. We expect yield curve to flatten from the current levels with the longer end of the yield curve compressing faster than the short end."