RBI governor, Shaktikanta Das, has an eye for catchy quotations. In his post policy address, Das quoted Nelson Mandela, “Part of being optimistic is keeping one’s head pointed towards the sun and feet moving forward”. In a way that is precisely what the policy did. It reflects optimism that this too shall pass. It also reflects the need to move on and not get distracted by the challenges along the way. Perhaps, he should have used the word, feet on the ground, but we shall leave that for another day.
Back to the more serious business of the monetary policy! In a way, the Monetary Policy Committee had its mandate cut out. They had to buy time till there was greater clarity. The RBI policy needed more clarity on the trajectory of inflation, the direction of Omicron and the outlook for Fed hawkishness, which will be evident on 15th December. Obviously, the RBI did not want to tighten ahead of X-factors like Omnicron and Evergrande. That was the underlying theme of the Monetary Policy announcement on 08-December.
Highlights of the Monetary Policy – December 2021
The repo rate stays at 4%; reiterating the RBI’s commitment to keep rates low till durable growth returned, or at least till the ghost of Omicron was exorcised.
One option was to hike the reverse repo rates from the current level of 3.35% but as the RBI pointed out, VRRRs had effectively raised the yields in the market.
As a result, the bank rate and Marginal Standing Facility (MSF) rate stayed pegged at 4.25%, with improved transmission doing a fairly good job.
The MPC also opted to maintain the accommodative monetary stance as it did not want to give any contrary signals when global developments were in a state of flux.
RBI maintained GDP growth estimate for FY22 at 9.5% despite Q2 GDP higher than RBI estimates by 50 bps. RBI lowered Q3 and Q4 GDP estimates to factor Omicron risks.
CPI inflation target for FY22 has been maintained at 5.3%. Despite marginally higher CPI inflation in Oct-21, RBI expects winter Rabi arrivals to temper food prices.
All 6 members of the MPC unanimously voted to hold repo rates at 4% to support the economy recovery, even in a worst case scenario.
While 5 out of the 6 members voted to maintain the accommodative stance of the monetary policy, Jayanth Varma opposed giving such blanket commitments.
However, the consensus view favoured status quo on all fronts.
Growth is getting better, but beware the Omicron effect
While maintaining the GDP target for FY22 at 9.5%, the MPC noted that due to the aggressive vaccination drive, the growth was turning more broad-based. However, despite the higher than expected Q2 GDP, RBI has lowered the growth projections for Q3 and Q2 to factor a possible lag effect of the Omicron variant. RBI wants to see more evidence of a recovery in contact-intensive industries before upgrading growth estimates.
RBI expects the growth to gradually recover on the back of government infrastructure push, broadening of Production Linked Incentives (PLI) and better capacity utilization of industry. FY22 GDP growth estimates have been held at 9.5%. GDP growth estimates have been lowered from 6.8% to 6.6% for Q3 and from 6.1% to 6.0% for Q4 to factor the Omicron lag effect. The GDP estimates have been maintained at 17.2% for Q1-FY23 and at 7.8% for Q2-FY23. Rural demand is expected to be a positive trigger.
Inflation estimates for FY22 maintained at 5.3%
With crude stabilizing at around $70/bbl and the vegetable and fruit inflation likely to be tempered by the winter Rabi arrivals, the MPC has maintained its inflation estimate at 5.3%. MPC underlined that aggressive supply side measures by the government and better demand management, like in sugar, have helped keep inflation in check during the year.
There are 2 key points made by the MPC. Firstly, the sticky inflation was an outcome of the havoc caused by late rains, which pushed up food prices. That is tempering now. Secondly, MPC has also warned that certain supply factors like transport costs, shortage of containers and raw material prices will continue to impinge on core inflation. Inflation outlook was held for FY22 at 5.3%. RBI projected inflation at 5.1% in Q3 and 5.7% in Q4. However, inflation is expected to taper to 5% levels in the first and second quarters of FY23.
Development and regulatory measures announced by RBI
In the last few policies, the RBI has made a lot of key announcements outside the policy statement and as part of regulatory measures. Here is a gist.
a) RBI has announced that, going ahead, banks meeting regulatory capital requirements will not need prior RBI permission to infuse capital in overseas branches and for retention and repatriation of profits. Only approval of the bank board will be needed.
b) RBI will present a discussion paper on the prudential norms for investment portfolio of banks. According to the RBI, these measures were more than 20 years old and did not reflect the changed scenario.
c) The RBI will encourage the shift of ECBs and foreign currency borrowings from LIBOR based pricing to a formula based on an alternate reference rate (ARR). The all-in cost ceiling has been raised by 50 bps to enable this transition.
d) RBI has noted that non-smartphone users have limited access to innovative payment products. Nearly 44 crore mobile users still use feature phones. With the NUUP not taking off, RBI is planning a dedicated UPI product for feature phone users.
e) RBI proposed further tweaks to digital payment system. Small transaction will be enabled through on-device wallet in the UPI app. To enable wider use of UPI, the RBI proposes to increase the upper limit for UPI transactions from Rs2 lakhs to Rs5 lakhs.
In a nutshell, the RBI has been trying to run with the hares and hunt with the hounds. The RBI has consistently expressed concerns over the liquidity glut in the market but has maintained an accommodative monetary stance. A lot could change by the time the next policy is announced by the RBI on 09th February.