IGI Logo

MPC minutes – focus on growth recovery, while being watchful of inflation

* The Monetary Policy Committee (MPC) resolution was in line with expectations, with the policy repo rate unchanged at 4% on 4th Jun’21. 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 only marginally upwards to ~5.1% in FY22, growth forecasts for FY22 were revised down by 1pp to 9.5% (from the forecast of 10.5% earlier). This was on account of rising COVID infections in the rural areas and dented demand in the urban areas.

* The RBI announced another set of measures aimed at managing the yield curve and enhancing liquidity. These measures include (a) the continuation of the secondary market G-Sec acquisition program (G-SAP 1.0) worth INR1.2t in 2QFY22, (b) additional refinance worth INR160b to SIDBI, and (c) an INR150b liquidity window for on-lending to contactintensive services at the repo rate, among others.

* The RBI’s focus continues to be on growth revival and yield curve management. Its continuous announcements of new liquidity measures and the extension of some already announced ones imply monetary policy normalization is not the immediate priority. We believe the RBI may choose to monitor the cause of the rising inflation with incoming data points and then decide accordingly.

Second COVID wave necessitates continuation of monetary measures

* The minutes of the MPC meeting held over 2 nd Jun’21 to 4th Jun’21 reveal the members view the second COVID wave and its impact on economic activity as a cause to continue to be Accommodative on ongoing monetary easing measures. According to Shaktikanta Das, Governor of the RBI, "The dent on economic activity due to the second wave of the virus has necessitated the continuation of monetary measures to support the process of economic recovery to make it durable. I therefore vote for a pause on the repo rate.”

* The governor alluded to the importance of the forward guidance of the MPC, including growth revival on a sustainable basis, indicating the committee’s clear focus on this.

* Members admitted that the sharp surge in inflation was more due to supply-side disruptions. Collectively, therefore, they saw no need for monetary policy action, at least at present. However, Dr Saggar raised a red flag by pointing out that the probability distribution in the fan chart indicated the risk of inflation breaching the upper tolerance level (of 6%) throughout the year is not insignificant. Additionally, he mentioned that had it not been for the extraordinary circumstances India is in, MPC would have moved to a Neutral stance long ago.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer