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Below are Views On Perspective On RBI's MPC announcement by Ms. Madhavi Arora, Lead Economist, Emkay Global Financial Services 

“ The MPC expectedly kept the key rates unchanged unanimously and reiterated its accommodative stance both on rates and liquidity. Guidance has become more open-ended and state-based amid new uncertainties and evolving nature of the economy, stating policy stance will remain accommodative till growth recovers sustainably. On macro parameters, the inflation forecast for 1HFY22 has been raised very mildly, FY22 inflation forecast is now at 4.9-5.0%, with risk to inflation forecast looking mostly balanced with strong food production output and to be countered by possible cost push pressures. The FY22 real GDP growth projection unchanged at 10.5% with minor downward revision in 1QFY22.

The bigger move was with regards to yield management as RBI tries to break the negative loop of liquidity (mis)communication and sovereign premia. The RBI stressed on smooth liquidity management and orderly Gsec borrowings, with a more vocal and defined secondary market GSAP 1.0 (Gsec acquisition program) to be read largely as an OMO calendar with secondary purchases worth Rs 1tn in 1QFY22. This could lead to much lower sovereign risk premia ahead amid elevated borrowing calendar this year. We reckon the RBI will continue to strive fixing artificially skewed yield curve and maintain its preference for curve flattening.

This is further re-established by the RBI’s re-instation of longer term VRRs, albeit again emphasising it should not be read as liquidity smoothening and not liquidity tightness. We expect the RBI to get more accountable and action oriented as we move into FY22. After all, a lower welfare cost of public debt may be needed when public funds are used for investments addressing growing economic externalities. We see net OMO purchases to the tune of Rs4.5-5tn in FY22 amid elevated supply, some natural normalization of liquidity in FY22 and shifting out of banks SLR demand. “

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