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Below are Perspective on RBI Monetary Policy Committee's announcement by Prof. Krupesh Thakkar, CFA, HoD - Financial Markets, ITM B-School

RBI MPC Announcement(April 2021)

The explicit accommodative stance of RBI from October 2020 was clear till date, popularly known as time-contingent forward guidance. However, this time RBI was faced with three challenges, rising inflation, stance to support growth and the controlling  rising  yields to smoothly  carry out the government borrowing  program.

Talking about inflation, though the latest CPI figures was still within the RBI’s targeted range of 2-6%, the rising fuel prices and its spill over impact was the concern. Also, the stiff core inflation with rise in costs of certain commodity and services presented the upside risks to inflation. However, RBI has still kept the medium-term target for CPI at 4 % (within a band of +/- 2 %). Sighting both downside and upside risks to inflation, RBI has projected CPI to be 5.0 % in Q4:2020-21 and 5.2% for Q1 and Q2 2021-22.

On growth front, it seemed that the downside risks growth has subsided and the economy has started to rebound. But we now face some uncertainty  in economy recovery due to renascence of rising cases of Covid-19 and delay in vaccination cycle.  Weather, it will increase the output gap would be too early to comment. Meanwhile the accommodative stance has been continued by RBI and accordingly quoting the rise in demand from both rural and urban area, RBI has kept its real GDP projection at 10.5% for FY2022.

On liquidity front, RBI has no option to keep providing liquidity and try to curb rising yields, as it has to make sure that government borrowing program is implemented without any hurdle, especially when the government looks to borrow Rs. 7.24 trn (around 60% of its full year borrowing target) in Apr-Sep FY2022. The growth supporting lending rate environment is key for India in this challenging time. And the announcement a secondary market G-sec acquisition programme or G-SAP 1.0 is one of the welcomed measure. Under the programme, the RBI will commit upfront to a specific amount of open market purchases of government securities with a view to enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions. This along with other measures will help to flatten out the rising yield curve and support government borrowing  program.

Overall, RBI has decided to continue with the accommodative stance ‘as long as necessary to sustain growth on a durable basis’ and ‘continue to mitigate the impact of COVID-19 on the economy’, while ‘ensuring that inflation remains within the target going forward’.

The notable change in the stance is that from explicit ‘time -contingent’ guidance, RBI has now again turned to the ‘state-contingent’ forward guidance -, i.e. stance will continue till a stance the explicit set of economic conditions and targets are met. That was perhaps the need of the hour and this will surely put the confidence in the money, capital and banking sector and public participants at general.”

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