All members of the MPC – Dr Shashanka Bhide, Dr Ashima Goyal, Prof. Jayanth R. Varma, Dr Mridul K. Saggar, Dr Michael Debabrata Patra and Shaktikanta Das – unanimously voted to keep the policy repo rate unchanged.
Mr. Abheek Barua, Chief Economist, HDFC Bank
The RBI has continued with its line of supporting growth despite the recent spikes in inflation. That said, recognizing the concerns around inflation (RBI revised up its inflation forecast to 5.7% from 5.1% for FY22) and the excess build-up in systemic liquidity over the last month (at INR 8.5 lakh crore as of 4 August), we saw the central bank take its second step towards liquidity normalization. The first being the tolerance towards some upward adjustment in the 10-year yield in July.
The RBI announced an increase in the quantum of variable reverse repos (VRR) by INR 2 lakh crore and also provided forward guidance on systemic liquidity to be close to INR 4 lakh crore by September-end. In response to tighter liquidity conditions, we expect short term rates to increase and return on instruments like CPs to rise. That said, this liquidity normalization should be viewed as a gentle calibrated move, partly in response to large excess liquidity surplus in the system, and not as an aggressive roll-back of monetary policy support.
With regards to the bond yield curve, while the 10-year yield is likely to inch up in response to the policy announcement today, the uneven structure of the curve could persist unless there are more evenly distributed interventions, across the curve, through G-SAP, OMOs, Operation Twists by the central bank.
Siddhartha Sanyal, Chief Economist and Head – Research, Bandhan Bank
While the status quo on rates with a 6-0 voting and continued “accommodative” stance were on expected lines, the split voting as regards the policy stance was a modest surprise. Still, the overall tone of policy continued to focus clearly on supporting growth recovery.
Given higher global commodity prices, sticky food inflation and rise in domestic fuel prices, inflation may stay higher than for the RBI’s comfort. However, with the tentative and uneven nature of recovery, one expects the MPC to continue prioritizing supporting growth in the coming months.
A. K. Das, Managing Director & CEO, Bank of India
“Continued accommodative stance of RBI is expected to catalyze growth in real segments in a strong, broad based and sustained manner”.
Rajni Thakur, Chief Economist, RBL Bank
“MPC announcements were pretty much on expected lines with key rates held constant and upward revision of inflation forecasts for the current fiscal year.
Policy bias in favour of nurturing growth continues and there was a strong denial of any urgency to scale back monetary support on account of higher inflation or potential global normalisation.
While enhanced VRRR quantum and one voice of dissent can be seen by market as mildly dovish, in all likelihood, RBI has kept its options open to support growth should the third wave disrupt nascent momentum or to use monetary tools to begin normalisation if growth -inflation dynamics start to get complicated.”
Rajeev Radhakrishnan, CIO - Fixed Income, SBI Mutual Fund
"A tweak in the quantum of liquidity absorbed under the 14D VRRR probably signals the first step towards the process of normalization of excess liquidity. At the same time, the policy guidance remains accommodative given the focus on revival of growth. A dissent in the MPC with respect to maintaining the accommodative stance is probably the other take away. We expect this debate to shape the MPC decisions going forward. Very clearly even as prioritization of growth revival remains the preponderant objective, the RBI would be mindful of the evolving CPI trajectory, the persistence as well as the shifting drivers of higher inflation across various segments and also the likely shift in policy by major developed markets. This probably warrants more incremental actions in a gradual manner going forward both in the quantum and tenor of VRRR."
Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund
“The RBI MPC left key rates unchanged – on expected lines. The accommodation bias was maintained too, however with 5-1 (1 member dissenting). The Variable rev repos (VRRR) amt was also graded increased from INR 2 tn to INR 4tn over next 1 month. This policy has embarked on liquidity normalisation as a start point, being mindful of growth drivers as well. We could see the yield curve gradually flatten with shorter end moving up tad faster than longer end. Markets could start pricing in possibilities of rev repo rate hike, though the policy refrained from any such guidance.”
Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company Limited-
“While the MPC has decided to maintain status quo on key policy rates and voted 5-1 in favour of continuing with accommodative stance in this meeting, it has also taken few expected steps towards normalisation of excess system liquidity. A phased increase in the quantum of Variable Rate Reverse Repo operations to INR 4 trillion is one such measure that in our view marks the beginning of a cautious withdrawal of exceptional, post-Covid accommodation. However, with continuing emphasis on orderly evolution of yield curve and ongoing support via GSAP, OMOs and OT, markets are expected to take these measures in to its stride. Going forward, we continue to expect further baby steps towards rate and liquidity normalisation as economy continues to improve.”
Sandeep Bagla CEO -TRUST Mutual Fund
“RBI policy is hawkish at the margin. RBI has acknowledged the strong growth and negative surprise on inflation front. One of the MPC members has voted for change in accommodative stance. While there is no real change in the policy, bond market participants will take the nuanced change in language seriously. There is a distinct possibility that yields at the longer end, 10 years, will inch up towards 6.50% gradually. Investors should invest in bond funds with lesser than 3 years maturity to minimise interest rate risk.”
Nitin Shanbagh, Head – Investment Products, Motilal Oswal Private Wealth
“RBI continues to prioritize growth and maintain financial stability as far as necessary. Having said, it remains mindful of anchoring inflation expectations.
While maintaining a balance between growth/inflation dynamics, RBI is likely to continue with orderly evolution of the yield curve through OMOs & GSAPs. Till durable growth recovery is seen, RBI may not resort to reversal of policy rates and would maintain sufficient liquidity in the system. However, RBI may gradually signal towards normalization of rates.
From investors point of view, focus should be towards investing in high quality roll down accrual strategies through a bar-bell approach viz. combination of short term and long term maturity strategies with weighted average portfolio average maturity of 4-5 years. For yield enhancement, investors can also consider investing upto 25% in well researched REITs, InVits, select high yield MLDs, etc.”
Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisors
The RBI kept the rates unchanged in its monetary policy statement and kept the stance accommodative. They kept the growth unchanged at 9.5%. The inflation was expected to be at 5.7% up from 5.1% for FY’22. One member has voted against the accomodative. Bond yields rose on less dovish policy from RBI. The stock markets fell as the Amazon-RIL Future Group verdict went in favor of Amazon in SC.
The rupee fell after making a high of 74.09 as RBI started absorbing inflows and importers bought dollars to hedge.
Ramani Sastri - Chairman & MD, Sterling Developers Pvt. Ltd.
With economic recovery on a positive note following a second wave of Covid 19, growth needs to be carefully nurtured in the context of a relaxation in economic activities. This can be done by giving a fillip to the economy by incentivizing real estate. For this to happen, we expected a cut in rates which would have sent positive signals to economic and real estate players. Not only would the cuts have bolstered greater demand for homes as the interest regime would have been lower, there would have been greater infusion of capital in the market, enabling easier supply-demand transactions. The regular home buyer would ofcourse take advantage of low interest rates prevailing now, but the overall demand in the real estate sector at a holistic level would have gone up further, thus giving a fillip to the economy. Fortunately, real estate has been one of the most resilient industries even amidst the pandemic and has been showing signs of recovery. Demand stimulant measures like credit subsidy or tax waivers even for a limited period can play a transformative role until we reach the pre Covid-19 normalcy thresholds. While the government has been introducing several initiatives to help the sector, some strategic support in the form of giving input credit on GST and lowered GST on raw materials etc. will support sustainable long-term growth and benefit the developers as well as homebuyers.
Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research
“As widely expected, MPC has continued with its accommodative stance without any alteration in the benchmark rates given the continuing uncertainty on the domestic growth trajectory and the persistent risks of a fresh wave of the Covid pandemic. While RBI maintained its GDP growth forecast at 9.5% for FY22, it is interesting to observe that the growth projections for the next few quarters in the current fiscal have been scaled down while enhancing the growth estimates for Q1FY22. This reflects the central bank’s concerns on the pace of consumption demand revival despite the expectations of a favorable Kharif crop, buoyant exports, steady progress in vaccination, and a conducive monetary and fiscal policy.
Importantly, MPC has also revised the inflation forecasts for FY22 to 5.7% from the earlier 5.1% given the inflationary overhang seen in the first quarter of the year. Nevertheless, it continues to believe that the inflationary pressures are transitory in the backdrop of supply-side constraints and a spurt in commodity prices. It is amply evident that RBI is comfortable with the headline inflation hovering around 6.0% i.e. the upper band in MPC’s inflation targetting framework in the current environment which it continues to label as ‘extraordinary’. Given the ‘relatively weak’ growth impulses and still ‘nascent’ investment demand, RBI would continue to be strongly supportive of growth over the next few quarters even at the cost of slightly higher inflation and the current policy statement is another reaffirmation of that stance.
While RBI would continue to maintain adequate systemic liquidity and implement the previously announced programmes like the GSAP, it has also announced its intent to manage short-term liquidity more actively through a significantly higher quantum of Variable Rate Reverse Repo Auctions (VRRR). However, there are no clear indications regarding the timeframe for the normalization of the policy corridor.
The policy support for the stressed sectors has been reaffirmed with the extension of timelines for TLTRO till Dec-21 and relaxation in some key financial parameters for the OTR under Covid. This will help in quicker resolution of some of the pending stressed exposures in the banking system.
Nirav Karkera, Head of research, Fisdom
“The corporate earnings season has kicked off on a relatively healthy note. This, coupled with healthy foreign inflows, improving public health situation and gradual uptick in trade is reflected comprehensively in broader indices. However, one must remain wary of looming risks in the form of lingering threat to public health, relatively fragile state of the capex cycle and risks associated with supply-induced inflation. The central bank maintains status quo in good acknowledgement of the problems associated with a pre-emptive reaction to reflationary trends, especially when the broader economics is struggling to get a stronger grip of expected revival.”
Dr. Samantak Das, Chief Economist and Head Research & REIS, JLL
RBI has upheld its accommodative stance and kept the repo rate unchanged at 4% during the monetary policy committee meeting held today. ‘Strong and sustainable growth’ continues to remain the cornerstone of the Central Bank’s philosophy while it takes into cognizance the current rising inflationary trends. Citing the high inflation levels to be transitory in nature driven by short term supply side constraints, the Bank draws attention to the promising high frequency indicators such as consumption, investment and external demand which are regaining traction as the economy is opening up in a phased manner.
With the concerns of the second wave ebbing supported by aggressive ongoing mass vaccination, broad-based policy support, normal monsoons, likely easing of supply side issues, RBI maintains its growth forecast for FY 21-22 at 9.5%. As the economy gradually gains foothold in the aftermath of the receding impact of the second wave, RBI has indicated greater confidence in the resilience of the Indian economy.
Green shoots in the residential sector have emerged in tandem with the gradual improvement in the economic environment as businesses reopen. Prevailing lower home loan rates supported by RBIs policy rate stance, stable prices and attractive payment plans and schemes of developers are aiding the translation of pent-up demand into sales. If the downward trajectory in COVID-19 cases is sustained, the sector is expected to make a healthy recovery in H2 2021.
Jimeet Modi, Founder & CEO Samco Group
The RBI MPC has continued its accommodative stance and maintained status quo on repo rates for the seventh straight meet in line with market’s expectation. Inflationary tendencies have been affirmed and the MPC has upped its inflation forecast for FY22 to 5.7% labelling inflation driving price pressures as "exogenous and transitory." While additional measures have been announced to comfort the banks on liquidity availability the continuance of the same will foster an atmosphere of affordability, which has emerged as the new characteristic of the housing market. Conditions around aggregate demand still remain weak and any rate hike would have further deferred growth. Hence, the central bank’s policy remained more balanced than aggressive as it remains on heels to ensure adequate liquidity within the economy.
Anjana Potti, Partner, J Sagar Associates
“The monetary policy reflects the overall market sentiment of ‘wait and watch’ with the projected GDP, inflation and liquidity being more or less constant. The MPC believes that continuing the accommodative stance will nurture the emerging and cautious recovery in the domestic economy in the relatively uncertain financial environment(where the pace of global recovery is being reined in by the resurgence of infections ) – which will go a long way in turn to reduce the uncertainty in the market factors for investors. In keeping with the accommodative stance, the RBI has also extended the TLTRO and marginal standing facility up to September 30, 2021 and December 31, 2021 respectively continuing to ease liquidity pressures on NBFCs and banks and boosts access to funds by the market. Considering the impact that the transition from LIBOR will have on the financial market, the RBI has decided to amend the guidelines related to export credit in foreign currency and restructuring of derivative contracts to permit the adoption of a widely accepted alternative reference rate in the relevant currency. As a consequence of such impending amendments the transition to an alternative reference rate will not be treated as a ‘restructuring’ under the ‘Prudential Norms for Off-balance Sheet Exposures of Banks – Restructuring of Derivative Contracts’
Dr. Poonam Tandon, CIO, IndiaFirst Life Insurance Company Limited
The RBI policy was on expected lines, where it maintained a status quo on policy rates with accommodative stance. While CPI inflation surprised on the higher side, GDP forecast has been retained at 9.5% in FY22. RBI believes continued policy support is required to support the nascent recovery. It announced VRR (Variable Reverse Repo), which is likely to absorb the excess liquidity. RBI also added that focus is on orderly evolution of yield curve. Overall, RBI remains committed to focus on durable recovery with sustainable growth while maintaining financial stability. It is important to ensure adequate liquidity in the system during these ambiguous times with a pro-growth, ample liquidity, and continuation of the policy stance.
Honeyy Katiyal, Founder of Investors Clinic
The recovery in real-estate has been on a growth trajectory and with RBI keeping its stance the same and with no rate hike, it will improve the sentiment further. The festival season is the make and breaks for the residential real-estate and some rate cut no doubt would have sent a strong signal to the investors and buyers, but unchanged rates is also a welcome step for the developers. With the overall growth being lower across sectors and inflation at a higher end, lower rates will go a long way to help a sector that is the powerhouse for employment generation.
Anagha Deodhar – Chief Economist, ICICI Securities
While the MPC’s rate action was along expected lines, the VRRR decision and one committee member voting against accommodative stance were early signs of normalisation. It upped inflation forecast for FY22 to 5.7%, a tad higher than our expectation and retained growth forecast at 9.5%. We expect the normalisation to continue with the RBI hiking reverse repo rate in two steps starting early next year. Commenting on growth outlook, the committee said accelerated pace of vaccination, expected pick up in government expenditure, the recently announced relief package by the government and easy financial conditions are expected to aid revival. On inflation, it said the current inflationary pressures are assessed to be driven by supply shocks and hence transitory. It also added that cutting fuel taxes can lessen the cost pressures.
Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank Ltd.
“In line with expectations, the MPC maintained a status quo on rates and its accommodative stance. The focus continues very much to be on growth which they see as “nascent and hesitant recovery”. Although inflation is above the comfort zone with an upward revision in estimates, the MPC does view it as transitory. Going forward, we can expect easy liquidity conditions and rates to continue to support economic growth even as the central bank monitors key indicators on Covid, growth and inflation for future policy guidance and action.”
Rajiv Sabharwal, MD & CEO, Tata Capital Ltd
The decision of maintaining rate status quo and continuing with the accommodative policy stance once again demonstrates RBI’s unwavering resolve to support growth in the economy. The rebound in the economic activity post the second wave has been faster and it is imperative to build on this momentum. The RBI has taken note of the broad based pattern of rising inflation due to adverse supply shocks and global increase in commodity prices. However, at this juncture, growth concerns outstrips the evolving inflation dynamics.
The systemic liquidity continues to remain surplus supporting rate transmission and maintaining the southward bias of the rate curve. The bond market anticipates normalisation of liquidity in the near future. It is important that the impact of the same will be absorbed without bringing volatility to the rate curve. The RBI is cognizant of sectoral asymmetry in credit transmission. The extension of on-tap TLTRO scheme and MSF for banks should further channelize credit flows.
Anubhav Jain, Co-Founder & CEO, Rupifi
“The MPC and RBI’s stance on maintaining the repo rate clearly indicates the regulator’s primary objective of economic recovery. While there are some green shots in economic recovery as per the policy statement, there continues to be a need for the industry and the government to work collectively to address the weakening conditions of MSMEs who have been impacted by the second wave. The today’s decision will definitely further aid MSMEs better manage their cash flows. That said, the opening of economic activities following accelerated pace of vaccination coupled with simple & easy access to credit will be a key for the businesses to return to normal.”