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Below are perspective on RBI`s MPC announcement by Ms. Madhavi Arora, Lead Economist, Emkay Global Financial Services

“The MPC expectedly stayed on hold and emphasised its commitment to keeping policy accommodative and maintaining ample liquidity as long as necessary. This more state-led guidance hinges on growth revival becoming durable. The 100bps downgraded FY22 growth forecast to 9.5% was accompanied with acknowledgment of rising uncertainty amidst Covid second wave and localized lockdowns, while inflation is seen at 5.1% for FY22, broadly same as last policy. The bigger move was with regards to yield management as the RBI stressed on smooth liquidity management and orderly Gsec borrowings, with a more vocal and defined GSAP . Of the residual Rs400bn GSAP 1.0 , around Rs100bn will be allocated to SDLs, while the GSAP 2.0 amount will be higher at Rs1.2tn for 2QFY21.  This would further ensure lower sovereign risk premia ahead amid elevated borrowing calendar this year. On other liquidity and regulatory front, Resolution 2.0 expanded to wider range of borrowers: (1) on-tap liquidity of Rs150bn for 3yrs at repo rate to provide loans to contact services and new liquidity worth Rs 160bn to SIBDI for on-lending for MSMEs and increase in the restructuring eligibility limits for MSMEs. Overall, while we do not see any action on the policy rate front in the coming months, we are poised to see a more accountable and action oriented RBI ahead. We reckon even as yields may inch up gradually and orderly, the RBI will continue to strive fixing skewed yield and maintain its preference for curve flattening (with GSAPs and OMOs). We see net OMO + GSAP purchases to the tune of Rs4.5-5tn in FY22.”

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