The overall tone of the policy remained dovish with a focus on growth and ensuring that the growth improvement is more long term and sustainable in nature.
Yet another policy done and dusted where eagerness of some sort of rate adjustment indications were on. In line with what we anticipated, the RBI MPC kept rates on hold while retaining the accommodative bias. This was a US Federal Reserve style delivery on policy front, where policy makers do not seem to be in a rush to exit the accommodative rate stance. However, as a progressive step toward normalising liquidity, we did see an increase in variable rate reverse repo (VRRR) amount from Rs 4 lakh crore to Rs 6 lakh crore – in a graded manner.
The focus of the policy clearly seems to rationalise liquidity, while being mindful on the growth front. This is evident from the fact that the RBI has stuck to its FY22 GDP forecast of 9.5 percent. Additionally, they have also marked down their CPI inflation forecasts from 5.7 percent to 5.3 percent. Thus we have not seen out of whack policy measures which could have had potential to derail growth momentum and/or see any abrupt rise in bond yields. This also means the policy makers are now on a wait and watch mode.
In that, one needs to be specifically watchful on the commodity pack. Natural gas so far is leading the race as the possible ‘Student of the year’ with YTD gains of around 150 percent. This is followed by diesel, gasoline, crude oil etc with gains of over 60 percent in CY 2021 so far. Hence the RBI also needs to keep a watch on potential imported inflation at a later date. But for now, it looks like headline CPI is on the decline, largely drive by base effects and a good kharif output, which has led to lowering of CPI forecasts as well.
The overall tone of the policy remained dovish with a focus on growth and ensuring that the growth improvement is more long term and sustainable in nature. Calibrating liquidity in a gradual manner allows for non-disruptive movement in rates – especially at the shorter end, which has liquidity as a key anchor. With G-SAP (Government Securities Acquisition Programme) being discontinued, we are back to need based RBI action on the bond buying front – a soft indication that tolerance for higher yields may be back. This is also in line with other economies across the globe.
On the currency front, we are pretty perched on forex reserves for now – yet INR may be under near term pressure as the dollar index gains strength. However, we rule out any abrupt moves on the currency front. The earliest that the RBI may likely look at reverse repo rate hike could be in February 2022 policy with some guidance in December 2021. In case COVID-19 cases do not spike materially post festivities in India, we could see the kick-start of the corridor narrowing process in December itself. Till then investors in fixed income may want to continue to ‘Earn the carry..’ while the mantra for central bankers could be ‘…Jaagte raho…’
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