RBI holds rates as expected, but focus shifts to debt management

The surprise element was the aggressive trajectory of the RBI role expounded by the RBI governor, Shaktikanta Das, in his post-policy press conference. The governor hinted at 3 shifts

Jun 04, 2021 12:06 IST India Infoline News Service

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To begin with, the RBI Monetary Policy statement was largely along expected lines. The surprise element was the aggressive trajectory of the RBI role expounded by the RBI governor, Shaktikanta Das, in his post-policy press conference. The governor hinted at 3 shifts. Firstly, the governor has indicated that the central bank is likely to be a lot more proactive in managing debt via yields for different maturities.

Secondly, the governor highlighted that with credit growth 500 bps below the deposit growth; the Credit / deposit ratio had tapered from 76% to 71% last year. This called for directed and focused credit disbursement. Lastly, RBI governor also hinted at more proactive forex intervention by the central bank, considering the comfortable reserve situation at $598 billion. This aggression was the highlight in a policy statement, that was otherwise along expected lines.

Highlights of the Monetary Policy – June 2021

Here are key takeaways from the Jun-21 monetary policy announcement by the MPC.
  • The repo rate was held at 4% and reverse repo rate at 3.35%; reiterating the RBI’s commitment to keep rates low till growth impulses were back.
  • Consequently, the bank rate and MSF rate which are pegged 25 bps above the repo rate, stayed put at 4.25%.
  • The MPC held the accommodative monetary stance to offset the COVID-II impact and is likely to remain so in the light of falling inflation
  • RBI tapered its full year GDP growth expectation for FY22 to 9.5% and CPI inflation for the full year to 5.1%.
  • All 6 members of the MPC unanimously voted to hold repo rates at 4% and keep the monetary stance accommodative.
Post COVID 2.0, growth remains the billion dollar question

With the fourth quarter GDP growth numbers reported at 1.6% for Q4 and -7.3% for FY21, the RBI has enough data points. The trajectory of growth is up and the recovery is for real, although COVID 2.0 may have thrown a spanner in the works. RBI has still projected full year GDP growth at 9.5% for FY22, but will depend on the pace and spread of vaccinations.

The FY21 GDP contraction for India at -7.3% was 70 bps better than the NSO estimates. But, high frequency indicators like IIP and core sector are showing smart yoy growth although the sequential growth points to slackening of growth impulses in May-21. For FY22, GDP growth is toned down by 100 basis points since the Apr-21 policy to 9.5%. Now, GDP is estimated to grow 18.5% (Q1), 7.9% (Q2), 7.2% (Q3) and 6.6% (Q4). The bet is on a smart recovery in the second half of FY22.

Data Source: RBI Monetary Policy Statement

MPC has flagged possible inflation risks

As can be seen from the above chart of growth and inflation expectations, the trajectory of inflation appears to be a lot more uncertain and even erratic. It is clear that growth will return once the impact of COVID 2.0 is managed. However, inflation is largely driven by global commodity prices, over which the RBI has little control. However, with inflation down to 4.3% in Apr-21, the RBI has the leeway of sustaining its accommodative stance.

Apart from the global commodity price boom, the current duty structure on petrol and diesel is also contributing to inflation. But, amidst the current macros, it is unlikely to change too much. Inflation outlook has been tweaked for FY22 to 5.1%. The RBI has projected inflation at 5.2% in Q1, 5.4% in Q2, 4.7% in Q3 and 5.3% in Q4.

A string of measures by RBI for a more proactive role

RBI announced key policy changes largely to reflect its own commitment to keep the economy chugging along. Here is a quick take.

a) Additional Rs15,000cr TLTRO window for contact intensive sectors like hotels, restaurants, tourism, tour operators, aviation etc for easy access to finance.

b) Additionally, special liquidity facility for SIDBI worth Rs16,000cr for MSME loan book enhancement in addition to Rs15,000cr already provided.

c) Exposure threshold for COVID related stress resolution raised from Rs25cr to Rs50cr to make it more broad-based and actionable

d) Authorized dealers (banks dealing on behalf of FPIs) allowed to place margins on behalf of FPIs for transactions in government securities.

e) Apart from accessing the liquidity window of the RBI, regional rural banks (RRBs) can now also issue certificates of deposit (CD) to eligible investors for greater flexibility

f) National Automated Clearing House (NACH) facility for benefit transfers to be available on all days round the year effective from Aug-21.

The theme of the policy is that the RBI will continue to support the growth impulses with sustained accommodative policies and low rates since growth is tapering and inflation is supportive. However, the bigger message is that RBI is willing to actually take the on-ground initiative to ensure that credit gets properly channelled and the C/D ratio gets back to pre-COVID levels. That is perhaps the biggest takeaway from the Jun-21 monetary policy.

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