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Dovishness continues

…as RBI believes weak demand would restrict pass-through of higher prices

* The Monetary Policy Committee (MPC) resolution was in line with expectations, with the policy repo rate unchanged at 4%. The reverse repo and Marginal Standing Facility (MSF) rates were also kept unchanged at 3.35% and 4.25%, respectively. Besides the decision on rates, all MPC members voted unanimously to continue with the accommodative stance for as long as necessary.

* Although inflation forecasts were revised up only marginally to ~5.1% in FY22, growth forecasts were revised down by 1pp to 9.5% (from 10.5% earlier) – on account of the increased spread of COVID infections in rural areas and dented demand in urban areas.

* The RBI announced another set of measures aimed at managing the yield curve and enhancing liquidity. These include (a) the continuation of the secondary market G-Sec acquisition program (G-SAP) worth INR1.2t in 2QFY22 (and INR400b to be purchased on 17th Jun’21, INR100b of which would be state government securities), (b) additional refinance worth INR160b to SIDBI, and (c) an INR150b liquidity window for on-lending to contact-intensive services at the repo rate.

* Overall, today’s monetary policy decision came on expected lines. The RBI’s focus remains on growth revival and yield curve management. It also continues to announce new liquidity measures and extend some already announced measures; this implies that monetary policy normalization is not the priority at present. We believe the RBI may choose to monitor the cause of the evolving inflation situation and then decide accordingly.

Policy interest rates kept unchanged

* Policy rates were kept unchanged…:

The MPC decided to keep policy rates unchanged – the repo rate at 4%, the reverse repo at 3.35%, and the MSF at 4.25%. Besides the decision on rates, all MPC members voted unanimously to continue with the accommodative stance for as long as necessary – to sustain growth on a durable basis (Exhibits 1, 2).

* …but the FY22 growth target was revised down, while the inflation estimate was revised up marginally:

While inflation projections for FY22 were revised up marginally to ~5.1% in FY22 (5.2%/5.4%/4.7%/5.3% YoY in 1Q/2Q/3Q/4QFY22), growth forecasts were lowered by 1pp to 9.5% for FY22 (18.5%/7.9%/7.2%/6.6% YoY in 1Q/2Q/3Q/4QFY22). Inflation risks are broadly balanced between better southwest monsoons, buffer stocks, and high global commodity prices. However, the fast spread of COVID-19 infections in rural areas and dented consumer demand in urban areas have broadly led to the growth target downgrade (Exhibits 2, 3).

* The series of new regulatory and liquidity measures continues:

The RBI also announced another set of measures in its policy statement on 4th Jun’21:

* The RBI extended its G-Sec acquisition program (G-SAP 1.0) to G.SAP 2.0 worth INR1.2t for 2QFY22. The central bank also announced the purchase of INR400b worth of government securities on 17th Jun’21 – as just INR600b has been purchased out of the INR1t announced for 1QFY22 on 4th Apr’21. Of this INR400b, the RBI would purchase INR100b worth of state government securities.

* An INR150b liquidity window for on-lending to contact-intensive services has been opened by the RBI up to 31st Mar’22 at the repo rate. These services include hotels and restaurants; tourism – travel agents, tour operators, and adventure/heritage facilities; aviation ancillary services –ground handling and supply chain; and other services, including private bus operators, car repair services, rent-a-car services, event/conference organizing, spa clinics, and beauty parlors/salons. This is over and above the INR500b window opened up for COVID-related healthcare infrastructure and services on 5th May’21.

* To further meet the funding requirements of MSMEs – with an additional focus on smaller MSMEs and businesses, including those in credit-deficient and aspirational districts – the RBI decided to provide a further special liquidity facility of INR160b to SIDBI (over INR150b provided on 7th Apr’21). The facility would be available at the prevailing policy repo rate for a period of up to a year.

* The RBI is focusing on growth and yield curve management: Overall, today’s monetary policy decision came on expected lines. The RBI’s focus continues to be on growth revival and yield curve management. It also continues to announce new liquidity measures and extend some already announced measures, implying that monetary policy normalization is not its priority currently. We believe the RBI may choose to monitor the cause of the evolving inflation situation and then decide accordingly.

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