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RBI remains more dovish than expected…

…keeps policy interest rates unchanged

* In line with our expectations, albeit, against market consensus the RBI’s Monetary Policy Committee (MPC) has kept all policy rates unchanged – the repo rate stood at 4%, the reverse repo rate at 3.35%, and the Marginal Standing Facility (MSF) was at 4.25%. The MPC has also maintained its accommodative stance. The decision on rates was unanimous; however, to keep the stance unchanged was taken with a 5:1 majority. The market consensus was to hike the reverse repo rate by 20bp to 3.55%.

* As far as economic projections are concerned, the RBI pegged its FY23 real GDP growth forecast at 7.8%, while inflation forecast was intact at 4.5%. We believe that growth could disappoint, while inflation could be ~5% next year.

* The RBI also announced two measures to manage liquidity and one to enable foreign investment in domestic securities today (10th Feb’22). Firstly, Variable Repo Rate operations (VRROs) of varying tenors will be conducted as and when warranted by the evolving liquidity and financial conditions. Secondly, VRROs and Variable Reverse Repo Rate (VRRRs) of 14-day tenor will operate as the main liquidity management tools. Thirdly, the investment limit under the Voluntary Retention Route (VRR) scheme (introduced in Mar’19 to facilitate long-term investment by FPIs in debt securities issued by the government and the corporates) has been enhanced to INR2.5t from INR1.5t with effect from 1st Apr’22. This is believed to provide access to additional sources of capital for the domestic debt market including G-Secs.

* After today’s policy announcement, it is clear that domestic monetary policy normalization will be tailored to India’s macroeconomic situation, which implies that the process might be much slower than in advanced economies. The policy statement was more dovish than expected and the bond market surely cheered it. The RBI continues to be worried about economic activity post the third wave while being vigilant about inflation not breaching the MPC’s medium-term target for too long. As we have argued, the growth is a bigger concern in India than inflation, and thus, monetary policy normalization must be more gradual. Accordingly, a reverse repo rate hike in Apr’22 is on, but with lower probability.

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