Views of industry leaders on RBI monetary policy

10 Feb 2022 , 01:47 PM

Below are the comments of industry leaders on RBI’s Monetary Policy

Prakash Agarwal, Director and Head — Financial Institutions, India Ratings and Research

‘RBI stance of status quo could slow down the pace of deposit rate hikes by banks, especially on the shorter end of the tenor while providing momentum to the improved loan growth in the system.  Additionally, it could further steepen the yield curve which is already at elevated levels. As the financial conditions has eased, it is been observed that the borrowers both corporates and non-banks have been increasing their CP borrowings. The wide tenor premium may further accelerate this trend.’

Aditi Nayar, Chief Economist, ICRA Limited

“As we had expected, the MPC and RBI maintained a full status quo, on the stance, repo rate and reverse repo rate, with no change in the voting patterns of the six members. The tone of the policy review appeared sanguine on domestic inflation and cautious on growth, with a view to not sacrificing the latter in a futile attempt to control imported inflation.

With the Governor dousing fears of premature tightening and no additional MPC member voting for a stance change, a shift to a neutral stance in April 2022 appears to be ruled out, unless the CPI inflation exceeds the upper threshold of 6.0% in both January and February 2022.

The MPC’s forecast of a 4.3-4.5% GDP growth in H2 FY2023 belies conviction in a back-ended pickup in growth driven by Government and private capex.

With the tone being more dovish than expected leading to a back-ending of rate hike expectations, and the comeback of the reference to an orderly evolution of the yield curve, the 10-year G-sec yield cooled back to pre-budget levels. We continue to expect the 10-year yield to cross 7.0% in April 2022, once the FY2023 borrowing programme kicks off. However, it is likely to climb more slowly thereafter, given the postponement in the likely timing of the first repo rate hike to August 2022 or later, from our earlier expectation of June 2022.”

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

“The RBI remained dovish and continued to support growth as it kept policy rates and stance unchanged. We believe that it would have been opportune to start policy normalization with atleast a 20 bps hike in reverse repo without much of market impact. However, today’s policy risks sharper adjustments if inflation risks materialise. Inflation risks, especially from fuel prices, remains a concern and can materialize relatively soon. Compared to RBI estimates, we estimate FY2023 GDP growth 30 bps higher at 8.1% and FY2023 CPI inflation 50 bps higher at 5%. We believe it would be opportune to increase reverse repo rate hike by 40 bps in the April policy.” 

Arvind Chari — CIO, Quantum Advisors

We found the MPC statements and the comments from the RBI governor to be needlessly dovish. The bond markets have already priced in a move away from accommodative policy in the months to come. Maybe they felt some segments of the bond market are over-reacting and hence wanted to temper the actions by maintaining status quo.

However, the RBI should be preparing the markets on the change in policy. The backdrop has changed. A) Global commodity prices pressures remain. B) The developed world central bankers are normalising monetary policy. C) We are no longer in crisis and hence do not need crisis time rates and monetary support.

Growth already seems to have recovered to long-term trend levels. Also, given that the government has assumed the mantle of supporting and reviving growth, the RBI needs to prioritise financial stability and inflation.

The RBI would have been better off guiding on how they would normalise liquidity and interest rates in the coming months.

We do understand that the Indian economic cycle is different and inflation pressures are lower due to contained food price inflation. Also, there may be an effort by the RBI to try and de-link India from the actions of the developed world central bankers.

The MPC and the RBI also seem to be drawing a lot of comfort from the CPI forecast for FY23 @ 4.5% and hence signalling they have enough space and room to continue with accommodative stance and decade low policy rates. That CPI estimates seems well below market forecasts and I believe assumes lower oil prices/ or lower pass through.

For now, this delay in rate normalisation would mean that bond markets will rejoice for a while. Long-term bond yields are back towards pre-budget levels. 

Todays’ outcome is even better for the short to medium term segments as that was more susceptible to any changes in RBI liquidity and interest rates policies.

For the medium to longer end of the bond markets, it is back to watching oil prices, US treasuries and the weekly demand/supply situation in the auctions.

We continue to maintain that the RBI will move its policy stance to neutral. It will move the operational policy rate to the Repo rate. And it will hike the Repo rate by 100 bps by March 2023. Liquid funds remain a good way to play this interest rate tightening cycle.

Given the steepness of the yield curve, there are opportunities at some segments of the government bond yield curve. If you have a time horizon of 3 years+, then a combination of liquid fund and say a dynamic bond may work well over locking in at current rates in fixed deposits, provided you gradually increase your allocation to dynamic/long term bond funds on every rise in market yields in the coming year.

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

“The perfect V-day gift to bond markets was delivered on P-day today. No change in rates or stance is a big boost to sagging bond prices and a much needed respite. No major worries on inflation front as well. FY23 inflation forecasts at 4.5% also seems absolutely fine for yield. This coupled with the current liquidity situation calls for anchoring of bond yields and expect positive sentiment to revive in bond markets in near term.” 

Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund

“RBI continues to chart a course diametrically opposite to what most Central Banks have been doing. A status quo on rates and guidance was accompanied by the governor’s statement that continued to stress on continued policy support to ensure broad based and durable growth, along with continued reference to the impact of the pandemic. A few procedural changes on the liquidity framework were accompanied with no clear guidance on unwinding durable liquidity.

While the near-term impact has been an easing in rates with a curve steepening bias, continued reluctance to acknowledge a shift, in the context of changing dynamics both globally and with recovering domestic growth remains surprising. In this context, continued volatility in market rates remains the base case as there seems no clear fundamental reason to validate lower rates, except continuing dovishness and lack of pre emptive policy normalisation actions by the central bank.”

Amar Ambani, Senior President and Head — Institutional Equities, Yes Securities

“RBI delivered an ultra-dovish policy by maintaining a status quo on the policy rates and the stance. The status quo has triggered strong rally in sovereign bonds, with benchmarks yields retreating from the recent highs. It clearly conveys that RBI is quite committed to orderly evolution of yields, notwithstanding the headwinds in the form of inflationary pressure, hawkish Fed and a large Indian government borrowing plan for FY23. Its stance is backed by its expectation of easing of price pressures by end of the fourth quarter of FY22. This dovish policy is in line with our view that RBI will support growth and not turn hawkish for as long as it can, considering that the US Fed is looking to taper and raise its rates.”

Anish Mashruwala, Partner, J Sagar Associates (JSA)

“The RBI MPC statement today underlined its supportive stance towards growth and revival to pre-pandemic levels, keeping in line with the recent Budget. However, while ensuring that there was positive messaging around growth and revival measures, the RBI did not lose sight of its inflation oversight and check and the announcement had calibrated caution to deal with any external shocks related to crude prices and the resurgence of any Covid variant.

Accordingly, while keeping policy and interest rates unchanged as per market expectations it was also emphasised that both core inflation and headline inflation were within tolerance limits and were being monitored. The announcement further stated that given the RBI measures and the outlook an accommodative stance on policy measures would also be possible in the near future indicating that a continued growth trajectory was being prioritised to bounce back from the pandemic.

The announcement also recounted the success of various RBI action on the banking and non-banking industry during the pandemic as well as the actions to maintain liquidity. The announcement did keep the “icing on the growth cake” for last by announcing additional measures at the end. In particular the enhancement of the limits by Rs1 lakh crores to take the limit to Rs2.5 lakh crores for FPIs in the long term debt investment under the VRR route will be cheered by both domestic industry and foreign investors. 

The MSMEs were not left behind in the party with the increase in the settlement limits in NACH from the current Rs1 lakh crore to Rs3 lakh crores under the TReDs receivable discounting platforms for MSMEs. All in all today’s was a very positive announcement for a return to normalcy from the pandemic and as the Governor indicated that while protecting life remains the first priority in the wake of the pandemic, economic livelihood is also the rising focus in the list of priorities.”

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research

“RBI has decided to reaffirm its existing accommodative stance and has not moved any of the benchmark rates including the reverse repo rates. It continues to highlight the risks from the pandemic and the impact of Omicron on the economy and has reinforced its bias for supporting the economic revival to the extent possible. It has also put forward its moderate view on inflation and has persisted with its average forecast of 5.3% for CPI inflation in the current year despite the headwinds from high crude oil prices. It is of the opinion that the inflation print is largely driven by the base effect in the near term and given the benign outlook on food inflation, it doesn’t have any serious concerns on this front.

It has also further reaffirmed its policy on flexible and dynamic liquidity calibration in the system. Going forward, there will be larger focus on variable rate auctions both on the repo and the reverse repo side. In essence, it implies the limited importance of the reverse repo rate as the short term rates will be dependent on the dynamic liquidity position at a particular point in time; in the near past, the rate on VRRR auctions have been very close to the repo rate of 4.0%.

As regards support to the vulnerable sectors, RBI has decided to continue the on tap liquidity facility for contact intensive and health services sectors.

Overall, RBI has consciously taken a different stance on its monetary policy vis-à-vis the other key central banks by persisting with the accommodative stance on the expectation that inflation will remain relatively moderate in India till growth and demand signals become strong and durable.”

Prasenjit K. Basu — Chief Economist, ICICI Securities

Given global headwinds and the prospect of a gradual moderation of India’s CPI inflation, it is eminently sensible to persist with the accommodative stance.

A key reason to keep the policy interest rate at historic lows longer is to spur a more durable rebound in private consumption. India did not massively boost monetary growth during the worst phase of the pandemic (as the US Fed, ECB and BoE did), so there is less need for the RBI to roll back monetary accommodation this year.

As the strong rabi crop boosts food supply in April-June, and other supply disruptions from the Third Wave of the pandemic recede, India’s CPI inflation will moderate, allowing policy rates to remain low for longer than in the developed world. That will provide a boost to equity valuations, and help spur a broad-based recovery in consumption and investment.

Dhiraj Relli, MD & CEO, HDFC Securities

“The MPC of the RBI decided to keep key rates unchanged at its meet on Feb 08-10 and maintained accommodative policy stance. The outcome was more dovish than most economists expected. Though the intent of the RBI to support the recovery in economy in the face of disruption due to Omicron variant is commendable, economists will now  fear whether the RBI will fall behind the curve, having maintained the easy monetary stance longer than most other Central Banks had.

The RBI has projected 4.5% CPI in FY23 (vs 5.3% for FY22), with CPI expected to fall sustainably below 5% in Q3FY23. One hopes that the inflation trajectory will soon come under control and the bet of the RBI pays off. Quarterly GDP growth projections remain volatile due to base effect with 4.5% growth projected for Q4FY23 compared to 7.8% for the whole of FY23. Equity markets may temporarily welcome this decision but will be largely driven by the balance Q3 Corporate results, outcome of state elections and changes in global risk appetite.”

Shrikant Shitole, President – CREDAI MCHI-KDU & Managing Director – Tycoons Group

“We welcome RBI’s decision to keep the repo rates unchanged at 4% and reverse it at 3.35%. The real estate market has been buoyant post the COVID-19 crisis. The low interest is one of the key factors in creating and reinstating momentum demand in the real estate industry and we expect that this sectorial demand for growth continues in the future as well. So far, RBI has held on to the interest rates that have sustained the demand generation in the real estate sector. We sincerely hope that the low-interest rate sustains for a longer period of time and further help reinstates demand in the realty industry.”

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