On expected lines, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), which met from April 5 to April 7, has voted unanimously to leave the policy repo rate—the rate at which the central bank lends short-term funds to banks—unchanged at 4%.

The MPC also decided to continue with the ‘accommodative’ stance as long as necessary to sustain growth on a durable basis, and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.

With the status quo on interest rates, the central bank’s marginal standing facility (MSF) rate and the bank rate remains unchanged at 4.25%, while the reverse repo rate—the rate at which banks can park their surplus liquidity with the central bank—stands unchanged at 3.35%. Academically, The repo rate is the rate at which the central bank lends money to commercial banks, while reverse repo is .

According to Kochi–based V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, the monetary policy announcement is on expected lines without changes in policy rates and stance. “However, reading between the lines, one can conclude that the stance is more dovish than expected with the governor reinforcing the central bank's commitment ‘to remain accommodative to support and nurture the recovery as long as necessary’,” said Vijayakumar. He added that the bond market has taken the announcement positively with the 10-year yield moving to 6.12%. “The governor's assurance to ensure an orderly evolution of the yield curve is confidence-inspiring.”

In his virtual post-policy address, RBI governor Shaktikanta Das highlighted that since the last MPC meeting—from February 3 to February 5— headline inflation, after moderating close to the target rate in January 2021, firmed up to 5.0% in February 2021, primarily due to an adverse base effect. “Looking ahead, the evolving CPI inflation trajectory is likely to be subjected to both upside and downside pressures,” Das said.

According to the MPC, the bumper food grain production in FY21 should result in softening of cereal prices going forward. However, mitigation of price pressures on key food items, such as protein-based components and edible oils, would also depend on supply-side measures and easing of international prices. “The MPC noted that underlying inflation pressures emanate from high international commodity prices and logistics costs,” said Das. “The softening in crude prices seen in recent weeks, if it sustains, can assuage input cost pressures.”

On domestic economic growth, Das mentioned that the focus must now be on containing the spread of Covid-19 as well as on economic revival—consolidating the gains achieved so far and sustaining the impulses of growth in FY22. A key aspect of this strategy, according to the RBI governor, will be to strengthen the bedrock of macroeconomic stability that has anchored India’s revival from the Covid-19 pandemic. “This will help stakeholders in taking efficient spending decisions over longer horizons, thereby improving the investment climate,” Das said.

The MPC also noted that the juxtaposition of high-frequency lead and coincident indicators reveals that economic activity is normalising in spite of the surge in Covid-19 infections. The MPC is also of the view that while rural demand remains buoyant, and record agriculture production in 2020-21 bodes well for its resilience, urban demand has gained traction and should get a fillip with the ongoing vaccination drive.

The recent surge in Covid-19 infections, however, adds uncertainty to the domestic growth outlook amidst tightening of restrictions by some state governments. “In India, we are now better prepared to meet the challenges posed by this resurgence in infections,” said Das. “Fiscal and monetary authorities stand ready to act in a coordinated manner to limit its spill-overs to the economy at large and contain its fallout on the ongoing recovery.”

Talking about the GDP growth prospects for FY22, Das warned that the increase in international commodity prices since the MPC’s February review, and recurrence of global financial market volatility like the bout experienced in late February, accentuates the downside risks.

The upside risks, however, come from a mix of factors like the vaccination programme being speeded up and increasingly extended to the wider segments of the population; the gradual release of pent-up demand; and the investment-enhancing and growth-supportive reform measures taken by the government. Taking these factors into consideration, the MPC retained its projection of real GDP growth for FY22 at 10.5%. On a quarterly basis, the MPC foresees 26.2% growth in Q1FY22; followed by 8.3%, 5.4%, and 6.2% growth each in the subsequent quarters of the current fiscal.

On the inflation front, the MPC pointed out that the headline inflation at 5% in February 2021 remains within the tolerance band, while some underlying constituents are testing the upper tolerance level. Going forward, in the MPC’s view, the food inflation trajectory will critically depend on the temporal and spatial progress of the Southwest Monsoon in its 2021 season.

Also, some respite from the incidence of domestic taxes on petroleum products through coordinated action by the Centre and states could provide relief on top of the recent easing of international crude prices. However, a combination of high international commodity prices and logistics costs may push up input price pressures across manufacturing and services. Taking all these factors into consideration, the MPC has revised its projection for CPI inflation to 5% in Q4FY21; 5.2% each during the first and second quarter of FY22, followed by 4.4% and 5.1% each in the third and fourth quarters, with risks broadly balanced.

Further, on the liquidity guidance front, the RBI governor continued to reiterate the central bank’s commitment to ensuring ample system liquidity in consonance with the accommodative stance of the MPC. “When I say ample liquidity, I mean a level of liquidity that would keep the system in surplus even after meeting the requirements of all financial market segments and the productive sectors of the economy,” said Das.

While laying out the liquidity management strategy for 2021-22, Das unequivocally stated that the RBI’s endeavour is to ensure orderly evolution of the yield curve, governed by fundamentals as distinct from any specific level thereof. “The Reserve Bank will, of course, continue to do whatever it takes to preserve financial stability and to insulate domestic financial markets from global spillovers and the consequent volatility,” Das said. He also urged market participants to take heed of the RBI’s actions, communication, and signals in a balanced manner. “Together, we can overcome the challenges and lay the foundations for a durable recovery beyond the pandemic.”

“We expect the RBI to get more accountable and action oriented as we move into FY22,” said Madhavi Arora, lead economist at Mumbai–based Emkay Global Financial Services. “After all, a lower welfare cost of public debt may be needed when public funds are used for investments addressing growing economic externalities.”

Among other measures, Das announced that the targeted long-term repo operations (TLTROs), announced on October 9 last year with a view to increasing the focus of liquidity measures on revival of activity in specific sectors, which was made available up to March 31, 2021, have been further extended by a period of six months, up to September 30, 2021.

Also, during April–August last year, special refinance facilities of ₹75,000 crore were provided to All India Financial Institutions (AIFIs) like NABARD, SIDBI, NHB, and EXIM. In order to nurture the still nascent growth impulses, the MPC felt that it was necessary to support continued flow of credit to the real economy. Accordingly, Das announced liquidity support of ₹50,000 crore for fresh lending during FY22. Of this, ₹25,000 crore would be provided to NABARD, while ₹10,000 crore and ₹15,000 crore each would be provided to NHB and SIDBI, respectively.

According to Abheek Barua, chief economist at HDFC Bank, fears of any premature tightening—either through rates or liquidity management by some sections of the market—have been put to rest by the RBI’s dovish tone today. “The governor was, for instance, categorical that the changes in liquidity measures announced today does not constitute tightening,” Barua said.

Beyond the core of the monetary policy, as part of development measures, the RBI enhanced the current limit on maximum end-of-day balance of ₹1 lakh per individual customer of payment banks to ₹2 lakh with immediate effect. The move was with a view to further financial inclusion and to expand the ability of the payments banks to cater to the growing needs of their customers.

Also, the membership to the RBI-operated centralised payment systems (CPSs), namely RTGS and NEFT, is currently limited to banks, with a few exceptions. “It is now proposed to enable non-bank payment system operators like Prepaid Payment Instrument (PPI) issuers, card networks, white label ATM operators and trade receivables discounting system (TReDS) platforms regulated by the Reserve Bank, to take direct membership in CPSs,” Das said. He explained that this facility was expected to minimise settlement risk in the financial system and enhance the reach of digital financial services to all user segments.

In conclusion, Das argued that in contrast to the previous year, the hope generated by vaccination drives in several countries at the start of 2021 has been somewhat offset by rising infections and new mutant strains worldwide. Yet, the speed and collective endeavour with which the world mobilised scientific energies to develop vaccines, and pandemic-related protocols, that have now become a way of life, give hope and confidence that the world will sail through this renewed second/third surge.

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