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Below are Views On Monetary Policy Review by the RBI by Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India

The Monetary Policy statement of the RBI was quite in line with our expectations. RBI kept policy rates unchanged and continued its accommodative policy stance (as long as necessary) to sustain growth on a durable basis and to mitigate any adverse impact of Covid-19, while continuing with its inflation-targeting approach.

With respect to growth, in RBI’s assessment, rural demand continues to be strong, while urban demand is also stepping up in line with the normalisation of economic activity. High frequency indicators and a revival in the Purchasing Managers Index point to the economic recovery being very much on track. The growth- oriented Union Budget, expanded PLI schemes and the rising capacity utilisation should provide strong support to investment demand and exports. RBI, however, has expressed concerns over the resurgence of COVID-19 across the country.

This, along with fresh lockdowns in some western countries, depressed demand in a few major economies, escalation in shipping charges and container shortages, adds uncertainty to the growth outlook. However, RBI feels that the Indian authorities are now better prepared to act in a coordinated manner (from both fiscal and monetary standpoint) to combat the risks emanating from the surging infections.

The inflationary outlook of RBI is throwing up mixed signals. While food inflation should be contained due to bumper food-grains production, the effect of high oil prices and commodity prices is starting to be felt across manufacturing and services sectors. On the liquidity front, RBI has been active through the variable rate reverse repo (VRRR) auctions in absorbing excess liquidity.

Encouraged by the success of VRRR, RBI has decided to conduct VRRR auctions of longer maturity, given that liquidity levels are still high. RBI, however, remains committed to providing liquidity support to the g-sec market, through Open Market Operations, and ensuring orderly evolution of the sovereign yield curve and smooth absorption of the Government’s borrowing programme. Towards this, the RBI has announced a focused G-sec acquisition programme (G-SAP 1.0) of Rs. 1 trillion.

Continuing the focus on ensuring sufficient liquidity and credit development support to the financial system, the RBI Governor also announced extension of TLTRO, additional liquidity facility for select financial institutions and providing extension to banks for on-lending to NBFCs. Overall, there wasn’t much surprise or novelty in the Monetary Policy statement. RBI has chosen the “wait- and-watch” approach as the economy stabilizes amidst a heightened pandemic situation.

RBI continues to be accommodative and supportive (of liquidity), while remaining watchful of evolving inflationary trends and the surplus liquidity. We expect the fixed income markets to follow suit, i.e. adopt a “wait-and-watch” approach with respect to the evolving liquidity and inflation situation. We continue to believe that rate cuts are behind us, unless the Covid situation really goes out of control, forcing much harsher lockdowns and loss of economic activity, which isn’t the base case currently.

A strong vaccination drive, coupled with temporary region-specific lockdown measures might be the order of the day. We expect the 10 year g-sec to trade in a range of 5.9% - 6.3% in the near-term. Yields could see some short- term relief (owing to pandemic risks to growth), but could see a fresh pickup in the second half of FY21-22 once the pandemic situation eases again and the focus is back on economic recovery.

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