IGI Logo

RBI keeps policy rates unchanged

Reverse repo hike likely in Feb’22, but could be postponed to Apr’22

* The MPC decided to keep policy rates unchanged – the repo rate at 4%, the reverse repo rate at 3.35%, and the Marginal Standing Facility (MSF) at 4.25% – as well as maintain its accommodative stance. Just like in the previous policy statement of Oct’21, the decision on the rates was unanimous. However, the decision to keep the stance unchanged was made based on a 5:1 majority, with Prof Jayanth R Varma alone expressing his reservations.

* Inflation projections were kept unchanged at 5.3% YoY for FY22 (below our expectation of 5.6% YoY), as was the growth forecast of 9.5% for the year (higher than our forecast of 9.1% YoY).

* The RBI proposed three measures to manage this surplus liquidity: a) to enhance the 14-day Variable Rate Reverse Repo (VRRR) auction amounts on a fortnightly basis in the following manner – INR6.5t on 17th Dec’21 and INR7.5t on 31st Dec’21; b) to provide an option to banks to prepay the outstanding amount of funds availed under the Targeted Longterm Repo Operations (TLTRO) 1.0 and 2.0 announced on 27th Mar’20 and 17th Apr’20, respectively; and c) to return to the normal dispensation under the MSF. They will now be able to use up to 2% of Net Demand and Time Liabilities (NDTL), instead of 3% for overnight borrowing, under the Marginal Standing Facility (MSF) from 1st Jan’21.

* While there were no major surprises in the policy statement today, we believe real GDP may come in lower than expected by the RBI, with inflation marginally higher. Along with the possible threat from the Omicron variant, this could postpone a hike in the reverse repo rate to Apr’22. On the contrary, if real GDP growth and inflation do come in line with the RBI’s expectations and the fear related to Omicron does not materialize, a 15bps reverse repo rate hike could happen in Feb’22. In any case, the Union Budget 2022–23 would also influence the MPC’s decision of Feb’22.

* Policy rates were kept unchanged: The MPC decided to keep policy rates unchanged – the repo rate at 4%, the reverse repo rate at 3.35%, and the MSF at 4.25% – as well as maintain its accommodative stance. Just like in the previous policy statements of FY22, the decision on the rates was unanimous. However, the decision to keep the stance unchanged was made based on a 5:1 majority, with Prof Jayanth R Varma alone expressing his reservations (Exhibit 1).

* Inflation and growth targets have been retained: The inflation projection was kept unchanged at 5.3% YoY in FY22 (5.1%/5.7% YoY for 3Q/4QFY22). Even the growth forecast was retained at 9.5% YoY for FY22 (6.6%/6% YoY) for 3Q/4QFY22). While the RBI’s inflation expectation is lower than our expectation (of 5.6% YoY in FY22), the real GDP growth forecast of 9.5% is higher than our assumption of 9.1% YoY for FY22. According to the RBI, inflation risks are broadly balanced between a) the reversal of the flare-up in vegetable prices during the winter, high rabi sowing, supply-side measures by the government on the downside; and b) cost-push pressures from high industrial raw material prices, transportation costs, and global logistic and supply chain bottlenecks on the upside. The RBI believes downside risks to the growth outlook remain highly uncertain. Therefore, the central bank deems it appropriate to wait for growth signals to become solidly entrenched, while remaining watchful of inflation dynamics (Exhibits 3, 4). The RBI expects CPI inflation of 5% YoY each in 1Q/2QFY23 (lower than our forecasts) and real GDP growth of 17.2%/7.8% YoY in 1Q/2QFY23 (much higher than our projections).

* The RBI announced measures to manage liquidity in the banking system: The RBI also announced three measures to manage liquidity:

* It proposed to enhance the 14-day VRRR auction amounts on a fortnightly basis in the following manner – INR6.5t on 17th Dec’21 and INR7.5t on 31st Dec’21. Consequently, from Jan’22, liquidity absorption would be undertaken largely via the auction route.

* As a step towards rebalancing the liquidity surplus, it was decided an option would be provided to banks to prepay the outstanding amount of funds availed under the TLTRO 1.0 and 2.0 announced on 27th Mar’20 and 17th Apr’20, respectively.

* Additionally, as the use of the MSF window has been rare due to surplus liquidity conditions, return to normal dispensation under the MSF was proposed. They will now be able to use up to 2% of NDTL, instead of 3% for overnight borrowing, under the MSF from 1st Jan’21. This dispensation, which was provided at the beginning of the pandemic, boosted market confidence at a crucial time.

The reverse repo rate hike could be postponed to Apr’22: While there were no major surprises in the policy statement today, we believe real GDP may come in lower than expected by the RBI, with inflation marginally higher. Along with the possible threat from the Omicron variant, this could postpone a hike in the reverse repo rate to Apr’22. On the contrary, if real GDP growth and inflation do come in line with the RBI’s expectations and the fear related to Omicron does not materialize, a 15bps reverse repo rate hike could happen in Feb’22. In any case, the Union Budget 2022–23 would also influence the MPC’s decision of Feb’22.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

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