IGI Logo

Below is 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. However, Prof Varma’s dissent on continuation of accommodative stance for foreseeable future continues to keep MPC in splits. Inflation forecast is expectedly reduced to 5.3% from 5.7% for FY22 (Emkay: 5.2%), while GDP growth remains unchanged at 9.5% (Emkay: 10.1%).  The RBI's stance on liquidity management was the most watched for. As we expected, the RBI did not shock the system with a reverse repo hike, and the policy is well used as a lever to prepare markets for a gradualist approach toward normalization through both communication and action. Expectedly, Markets are still assuaged that no premature tightening of financial conditions will happen and the orderly government borrowing and evolution of YC will be ensured. While the tenor and quantum of VRRR have increased, RBI has moved a step ahead by reducing further active liquidity infusion by not announcing new GSAP calendar after sterilising earlier two instalments with a simultaneous sale of bonds (OTs). While GSAPs may discontinue or get shallow and sterilized ahead, other tools like (1) possible higher intervention via the FX forwards route, and (2) partly rolling over its maturing forwards book. will remain preferred tools for liquidity management ahead. We do not see the RBI deploying any direct tightening tools like MSS, CRR hikes, FX swaps or outright OMO sales in the coming quarters. Instead, we expect the RBI to let natural stabilizers like increased credit offtake and high CIC etc. to reduce the liquidity surplus.’’

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