RBI Monetary policy reaction: Canara Robeco AMC

10 Feb 2022 , 04:46 PM

The first Monetary policy committee (MPC) of 2022, again surprised markets, albeit by not doing anything, and keeping status quo on all rates. With global central banks across the world doing a hawkish pivot on policies, it was expected that RBI may also start some reversal of an extremely accommodative policy stance, undertaken post COVID breakout in 2020, by increasing the reverse repo rate and reduce the corridor between reverse repo and repo rate to normal levels. However, citing uneven growth recovery, the MPC members judged that economic recovery was still incomplete and required continued monetary support. Hence, the monetary policy continues to complement the expansionary fiscal policy announced in the recent Budget for FY2022-23.

For FY2023, the MPC expects GDP growth of 7.8% (down from estimated 9.2% in FY2022), with growth slowing down in 2HFY2023. The MPC further expects inflation to peak out in current quarter and expects price pressures to decrease in coming months. While they expect some upward pressure on inflation due to current increase in crude prices, they have classified as a contingent risk. Accordingly the MPC expects average inflation to be around 4.5% in FY2023, which is near the 4% mid point of RBI range of 4%+/-2%. Therefore, the MPC views that they can remain accommodative in light of inflation being near target as well incomplete economy recovery.

On liquidity, RBI said they are likely to continue with the longer term variable reverse repo rate auctions (VRRR), with 14D VRRR remaining the main liquidity tool and other maturities of VRRR will be done as required. To shift more liquidity to VRRR, RBI is also curtailing timing when daily reverse repo and MSF (marginal standing facility) windows can be accessed. Further the Governor assured that “Monetary policy actions will be calibrated and well telegraphed”, underlining that there are likely to be no surprises.

The market reacted positively to the MPC policy, with 10Y dropping by about 10bps. The shorter end of the curve saw more rally, as RBI did not touch the reverse repo rate with 1yr rates dropping by 10-15bps. The recent partial/full cancellation of auctions had improved market sentiment leading to the policy and the positivity continued with RBI holding pat on rates. After touching a high of 6.95% in the Feb, 10Y GSEC has since retraced and currently at 6.72%. With only 2 more auction scheduled in current fiscal, supply pressure has eased. In the short term market may remain buoyant, however the large borrowing of FY2023 is likely to remain in market’s mind and any further rally is likely to be limited. In the short term 10Y Gsec may remain in range of 6.65-6.95%.

The author of this article is Mr. Avnish Jain, Head — Fixed Income, Canara Robeco Asset Management

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