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RBI announces a set of regulatory measures...

…while keeping policy rates unchanged

* The Monetary Policy Committee (MPC) resolution has come on expected lines with policy rates unchanged. The reverse repo, repo, and Marginal Standing Facility (MSF) rates were kept unchanged at 3.35%, 4%, and 4.25%, respectively. The decision on interest rates and to maintain its accommodative stance as long as necessary – at least during FY21 and into FY22 – was taken unanimously by all members of the MPC.

* While 4QFY21 inflation projection has been revised down to 5.2% now from 5.8% YoY (Dec’20 policy). The same for 1HFY22 has been revised up to 5-5.2% now from 4.6-5.2% YoY. Inflation projection is expected to ease to 4.3% in 3QFY22. Considering the sharp fall in vegetable prices in Dec’20 and Jan’21, RBI’s inflation forecasts appear on the higher side.

* On the growth front, the RBI expects real GDP growth at 10.5% YoY in FY22 on the back of a resilient rural economy and a strengthening urban economy, with a fall in COVID-19 cases and higher vaccinations. It expects real GDP to grow 6% YoY in 3QFY22. These projections are more optimistic than ours.

* The RBI also announced a slew of other regulatory measures, including allowing retail investors to directly invest in both primary and secondary gilt markets, extending the limits under Held to Maturity (HTM) category to 22% from 19.5% of NDTL by one-year to 31 Mar’23, opening up on-tap Targeted long-term Repo Operations (TLTROs) for nonbanking financial institutions (NBFCs), and phased restoration of cash reserve ratio (CRR).

* Apart from the measures that are aimed at ensuring a smooth rollout of the government’s massive borrowing program in FY22, most other liquidity-related measures either circled around extension (of date or coverage) or phased withdrawal of measures initiated by the RBI in its earlier monetary policies. This implies that the normalization of monetary policy will be gradual, enabling least disruption. While monetary policy will remain accommodative, further rate cuts are unlikely.

I. Policy interest rates kept unchanged Policy rates were kept unchanged...: The MPC decided to keep policy rates unchanged – the repo rate at 4%, the reverse repo at 3.35%, and the MSF at 4.25%. Besides rates, all members of the MPC voted unanimously to continue with the accommodative stance as long as necessary – at least during FY21 and into FY22 (Exhibit 1-2).

* …though the inflation target for 1HFY22 was revised up: The inflation projections, however, have been revised. From a projection of 5.8% YoY in 4QFY21 (Dec’20 policy resolution), the RBI now expects lesser inflation (5.2%) on lower vegetable prices. From an estimated inflation of 4.6-5.2% in 1HFY22 in Dec’20, it has now revised the same upwards to 5-5.2%, led by cost-push pressures in services and manufacturing prices due to increase in industrial raw material cost (Exhibit 3). The same is expected to ease to 4.3% in 3QFY22. We believe that actual inflation could be lower than RBI’s forecasts.

* Growth estimated at 10.5% YoY in FY22: RBI expects real GDP growth at 10.5% YoY in FY22 on the back of a resilient rural economy and a strengthening urban economy, with a fall in COVID-19 cases and higher vaccinations. It expects real GDP to grow 6% YoY in 3QFY22 (Exhibit 4). This is slightly more optimistic than our projection of 9.5% growth next year.

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