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Views of industry leaders on RBI monetary policy

MPC has retained the FY22 growth forecast at 9.5% but has slightly reduced the Q3FY22 GDP forecast to 6.6%, reflecting concerns on the global growth uncertainty along with high commodity prices, Acuité Ratings & Research says.

December 08, 2021 2:04 IST | India Infoline News Service
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

“The policy was as expected and cautious on the uncertainty due to the Omicron variant. Also, the RBI continued with the liquidity normalisation on expected lines without any explicit signal of liquidity withdrawal. The inflation estimates are also lower than what the markets are expecting. Broadly, the policy is more dovish-than-expected possibly given the uncertainty from the new Covid variant. If the Omicron variant is benign, we expect reverse repo hike of around 20 bps possible in the February policy and tad more aggressive liquidity withdrawal.” 

Ms. Aditi Nayar, Chief Economist, ICRA Limited

“Today's policy review maintained a complete status quo on the repo and reverse repo rates and the monetary policy stance, in line with our expectations, necessitated by the renewed uncertainty fuelled by the Omicron variant. While a subtle shift has been brought in with the comment that price stability remains the cardinal principle of monetary policy, the overarching tone of today's statement and forward guidance is less hawkish than what we had anticipated."

The comment on managing a durable, strong, as well as inclusive recovery, underscores concerns of a K-shaped trend underpinning the traction in economic growth.

With the MPC remarking that the ongoing domestic recovery needs sustained policy support to make it more broad-based, we now foresee a slightly lower likelihood of our base case assessment that the stance will be changed to neutral in the February 2022 policy review.”

Dharmakirti Joshi, Chief Economist, CRISIL Ltd.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept its policy rates unchanged and stance accommodative at today’s review meeting, but took steps to unwind the extraordinary liquidity it injected after the Covid-19 pandemic. In doing so, the central bank tried to strike a balance between supporting the ongoing economic recovery and responding to challenges emanating from inflationary pressures and external risks.

The MPC is taking cautious steps towards normalising policy as the Indian economic recovery remains uneven, with private consumption trailing pre-pandemic levels until the second quarter. The MPC was also comforted by the recent fall in crude oil prices and cuts in excise duties on petrol and diesel, which is likely to ease some pressure on inflation. That said, the evolving risks from the Omicron variant to growth-inflation dynamics need to be monitored.

The RBI may not have leeway to stand pat in the coming months, given two imminent risks: of persisting inflation, and the United States withdrawing monetary policy stimulus sooner than previously expected.A normalisation step was also announced by the RBI, which increased the size of upcoming VRRR auctions, and provided banks an option to pre-pay funds availed of under TLTRO, and reduced the funding availability under the Marginal Standing Facility. We expect the RBI to continue normalise its policy in a calibrated manner in the coming months, by hiking the reverse repo rate in February 2022 to reduce the gap with the repo rate to 25 basis points, followed by 25 bps hike in the repo rate in March 2022. The first reason for this is the prevailing pressure on inflation. Although prices of crude oil, metals and costs of shipping have moderated over the past month, they remain significantly higher than last year. This, coupled with supply disruptions such as semiconductor shortages, has maintained pressure on producer margins. A pass-through of input-cost pressures to consumers, which was already happening in the past months, is likely to continue as domestic demand improves further.

Food prices, including for major items such as cereals and vegetables, have also started rising sequentially over the past two months. Policy normalisation by the US Federal Reserve would be the second factor reducing the leeway for the RBI. Recent Fed minutes and remarks from Chairman Powell indicate their changing view of inflation not being transitory, and the possibility of increasing the speed of tapering next year. S&P Global expects the Fed to end its bond purchases by March 2022, leaving the year open for at least one rate hike. These developments, coupled with the new unknown risk in the form of Omicron, means going ahead, the RBI’s policy decisions will remain highly data-dependent.

Lakshmi Iyer, CIO – Debt & Head – Products, Kotak Mahindra Asset Management Company

“In what seemed like a close call, the RBI MPC chose to maintain status quo on key benchmark rates. No material changes to growth and inflation forecasts too. This suggests RBIs caution on the recent developments on the pandemic front. While 14 day VRRR amount has been increased in a graded manner, there seems to be no sense of urgency on RBI’s part to initiate any abrupt liquidity drain out measures. Bond markets should draw comfort from this decision and continue to trade range bound. Global cues to dominate the rate moves going forward.”

Mr. Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research

“While we had expected a partial likelihood of a modest hike in reverse repo rate in the Dec-21 MPC policy meeting, the central bank has stuck to its principle of ‘gradualism’ since the downside risks to a durable growth trajectory have clearly increased due to the spread of a new Covid variant. MPC has retained the FY22 growth forecast at 9.5% but has slightly reduced the Q3FY22 GDP forecast to 6.6%, reflecting concerns on the global growth uncertainty along with high commodity prices.

What is worthwhile to note is RBI’s dovish stance on inflation; although it has highlighted its concerns on the high core inflation levels and the input cost pressures, it has continued to retain its average headline CPI forecast at 5.3%. RBI continues to take comfort from the tax cuts in retail fuel and the steps that the government has taken to moderate prices in food categories such as edible oil and pulses. We, however, believe that the inflationary pressures are likely to be higher in the next few quarters if consumption demand picks up in a steady manner, given the expectations of continuing supply constraints in some sectors.

RBI, nevertheless, has continued to focus on ‘rebalancing of liquidity’ as was expected. VRRR auction will continue to be the primary tool for liquidity management and the auction amounts are set to go up higher to Rs 6.5 lakh Cr – Rs. 7.5 lakh Cr in Dec-21. At the same time, the auctions will have a higher proportion of 28 days vis-à-vis the primary tenor of 14 days. Slightly more steps have been taken to normalize the excess liquidity by reducing the additional quantum that was eligible under MSF. Further, banks have been permitted to prepay any their TLTRO withdrawals to optimize their liquidity position. Interestingly, there has been no guidance on the rate trajectory, even on the reverse repo front. This makes it difficult for us to predict the next steps on the yield front.”

Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services

As expected, RBI keeps all policy rates unchanged today (some section was expecting a hike in reverse repo). Further, the RBI maintains its FY22 real GDP growth/inflation projections at 9.5%/ 5.3%. Overall, there were no surprises in the policy today and it was broadly a non-event.

Going forward, we fear that real GDP growth could be lower than the RBI projections, with inflation falling broadly in line. Along with the rising threat from the Omicron variant, *there is a possibility that a hike in reverse repo could be postponed further to April 2022.

However, if growth turns out to be better than our expectations (or in line with/better than RBI projections) and Omicron threat doesn't materialize, a 15bps hike in reverse repo rate in Feb'22 cannot be ruled out. In any case, the Union Budget 2022-23 will also play an important role in the next MPC meet.

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services

Conceding that "there is considerable uncertainty in the growth-inflation dynamics" the MPC has again decided in favour of growth by contnuing with accommodative monetary stance and status quo in rates. More importantly, the guidance also is dovish with no indications of a rate hikes in the immediate future. The CPI inflation projection for Q3 and Q4 of FY22 at 5.1% and 5.7% respectively is an indication of RBI's belief that higher food inflation is temporary, since it is caused by crop damages during unseasonal rains. Also, the central bank believes that lower crude prices and reduced petrol and diesel prices will "mitigate the cost push build up." In brief, a pro-growth policy and very positive from the market perspective.

Rajiv Sabharwal, MD & CEO, Tata Capital Ltd

RBI maintains rate status quo and continues with the accommodative policy stance. The economy has gained growth momentum over the last 6 months, however RBI will want to further nurture a broad based recovery and will also aim at sustainability of the same. There is no upward change in the reverse repo rate as contrary to market anticipations. Also, at this juncture, RBI remains guarded against any adverse impact that may arise on account of the new Omicron Covid-19 variant.


Although inflation remains a concern, moderation of crude prices and the recent cut in excise duty will work in favour for the inflation trajectory. Also, Inflation is expected to be within the comfort corridor of the RBI. Over the last 2 months, RBI has been using various tools that has helped absorb excess liquidity from the system. The market has taken cue of this passive approach adopted by the RBI to normalize liquidity and we have seen rates move up across the yield curve. Further, RBI has once again assured the markets that adequate systemic liquidity will be maintained to achieve growth and stability.

Dr  M. Govinda Rao Chief Economic Adviser, Brickwork ratings

"The decision to hold the policy rates by the MPC is on expected lines. On the GDP guidance, the RBI has retained the growth forecast at 9.5% for FY22, while revising the Q3 estimate lower from 6.8% to 6.2% and Q4 estimate from 6.6% to 6%. Although the RBI has lowered its GDP forecasts for H2FY22, it hopes for a 17.2% growth in Q1FY23 mainly due to the base effect.  It has sounded the caution on downside risks to growth emanating from the normalization of liquidity in the advanced economies, global supply-side bottlenecks, elevated commodity prices and resurgence of Covid variants which may dampen the growth recovery.

On inflation, the RBI sees hardening of prices in Q3 FY22 but has retained the inflation forecast at 5.3% for FY22. The expectation of inflation moving within the MPC’s upper range provides scope for the continuation of the accommodative policy stance in the current fiscal. Overall, the MPC has continued with the assurance of continuation of accommodative stance to support and nurture the growth recovery.  It has also indicated the continuation of liquidity normalization keeping in view the requirements of the market".

Mr. Amar Ambani, Senior President & Head of Institutional Equities, YES Securities

“Though a status quo on the repo rate was in line with the market expectations, no move on the reverse repo was not what the money markets were pricing in. Yields in the money markets have been firming up, given that variable reverse repo auctions are being conducted at rates proximal to 4%. The status quo on the reverse repo is construed to be dovish. The central bank justified the status quo given the emerging uncertainty over the new COVID variant and lagging private investments. RBI is sticking with a tailored policy stance that balances growth and inflation. Meanwhile, RBI will continue to absorb excess liquidity in a non-disruptive manner, primarily through variable reverse repo auctions. On the demand side, RBI reckons frequency indicators portends traction in consumption, though it needs to sustain and needs policy support. Govt spending will provide support to aggregate demand. On projections, FY22 GDP growth is retained at 9.5%, while Headline CPI inflation is seen peaking in Q4 FY22 and then softening thereafter. CPI average of 5.3% is seen for FY22, falling to 5% in Q1 and Q2 FY23.

On the interest rate trajectory, we see that RBI has simply kicked the can down the road in terms of normalizing the LAF window. It seems that RBI is content with the fact that VRRR auctions have been efficacious in absorbing excess liquidity and do not want to tinker much with the policy rates now given the nascent economic recovery and still looming uncertainty of the pandemic. We think the normalization of the LAF window is now subject to the durability of the economic recovery and mitigation of the pandemic uncertainty. Meanwhile, normalization of the repo rate is completely ruled out till most of the H1 FY23.”

Yesha Shah, Head of Equity Research, Samco Group

The RBI maintained status quo and remained accommodative, in line with expectations, given the gloominess around Omicron and uneven recovery between unorganized and organized India. As “Growth” remains the linchpin of the policy and inflation concerns seems to be comparatively mellow, the policy seems reassuring to an extent. However, the decision may be influenced by the Fed stance as the MPC ensures not to “rock the boat.” There are some central banks across the globe who have already stepped up and pulled the plug on liquidity. RBI seems to be a backbencher on this front with no clarity on when the rate hikes might start. Other policy announcements in terms of liquidity management and progressively increasing VRRR are all moves in the right direction but at the end of the day is it enough only time will tell.

Dr. Poonam Tandon, Chief Investment Officer, IndiaFirst Life Insurance Company Limited

The RBI kept rates unchanged and continued with its accommodative stance. In our view the policy is very dovish as the focus continues to remain on achieving durable growth with no indication of a possibility of tightening in the near term. RBI stated that economic activity is improving on expected lines – FY22 GDP growth forecast is retained at 9.5%. RBI expects inflation to peak by March quarter and soften thereafter due to supply side measures taken by the Central Government and excise duty cuts – FY22 inflation forecast retained at 5.3%. The central bank stated effective liquidity management framework will be undertaken as global financial conditions remains volatile and has retained the flexibility to undertake liquidity operations in a calibrated and orderly manner through VRRR. Overall, monetary policy stance is accommodative and committed to supporting growth.

Manoj Nambiar, Managing Director, Arohan Financial Services, Ex-Chairperson, Governing Board of MFIN

“The RBI has continued with its line of support for growth, given the changing economic dynamics due to COVID-19.  Today's announcements will help support growth should the third wave disrupt the current economic momentum. Their stance on remaining ‘accommodative’ will go a long way in the sustainable recovery of the Indian economy.

In addition, the RBI has reinstated its increase in acceptance for digital payments by taking a concerted view on various aspects of facilitating better digital adoption, a definite way forward for the financial inclusion industry in India”.

Pankaj Pathak – Fund Manager, Quantum AMC

We had expected the RBI to hike the policy reverse repo rate from 3.35% as a firm signal that ‘the Indian economy is no longer in crisis’, and also provide guidance on how interest rates and liquidity will continue to be normalised going into 2022.  The status quo with no change in interest rates and no change in the guidance and outlook from the RBI was thus contrary to our expectations.

We believe that the Indian economy is recovering much better than expected and is showing signs of continued revival. Also, that underlying inflation pressures are higher than reported. This should mean that RBI will remove crisis level measures moving forward.

Investors should expect that interest rates on both deposits rates and lending rates will rise in the coming year, albeit gradually. As the RBI sucks out the excess liquidity in the banking system over the next month, we would expect the overnight rates to move from the current levels of 3.35% (Reverse Repo Rate) towards the Repo Rate of 4%. This would mean that accrual returns on a very short term, low market risk products like overnight and liquid funds could rise in the coming months.As the RBI hikes rates, Investors should prefer playing this rate hiking cycle by investing in liquid funds over keeping the money in bank savings accounts.

They should also avoid locking in their money for now in longer tenor fixed deposits. As we have been guiding, return expectations from fixed deposits and bond funds should remain low. We expect medium to long term bond yields to be range-bound but we mark out, Oil prices and the signals from the US Federal Reserve as the key risk indicators.

Mr. YS Chakravarti, MD & CEO, Shriram City

“RBI keeping interest rates unchanged is supportive of growth. While green shoots are beginning to show, private consumption continues to be below the pre-COVID levels.  MSMEs have started stabilizing, and we expect MSMEs to bounce back in 2022. Spending will pick up at the middle and lower-income groups as COVID impact fades, and fuel tax cuts will likely aid purchasing power. Two-wheeler demand in rural India has been lagging and should gain momentum in 2022. Omicron poses a risk, if widespread lockdowns return, the outlook will alter substantially.”

The views and opinions expressed are not of IIFL Securities, indiainfoline.com

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