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MPC minutes – Rapidly rising COVID-19 cases is the single biggest risk to the ongoing economic recovery

* The resolution of the Monetary Policy Committee (MPC) had come on expected lines, with the policy repo rate unchanged at 4% on 7th Apr’21. The reverse repo and Marginal Standing Facility (MSF) rates were also kept unchanged at 3.35% and 4.25%, respectively. Besides the decision on rates, all MPC members voted unanimously to continue with the accommodative stance as long as necessary.

* RBI also kept its GDP growth forecast unchanged at 10.5% (lower than the market consensus of 11%) and revised its inflation projections marginally to ~5% for FY22 (higher than the market consensus of 4.75%).

* Contrary to our expectation of no further monetary policy easing, the RBI announced a number of measures aimed at managing the yield curve and enhancing liquidity. These measures include conducting a secondary market G-Sec acquisition program (G-SAP 1.0), or what is popularly known as Open Market Operations (OMOs), to purchase government securities worth INR1t in 1QFY22, of which INR250b was purchased on 15th Apr’21; extension of on-tap Targeted Long-Term Repo Operations (TLTROs) up to 30th Sep’21; additional special refinance facility worth INR500b to All India Financial Institutions (AIFIs); among others.

* While the unchanged policy rates and stance were on expected lines, the tone of the monetary policy statement was rather dovish, contrary to our expectation. The rising second wave of COVID-19 cases may have caused the RBI to take a step back from the liquidity normalization process that it had started in Dec’20. In fact, RBI’s major focus at this point in time seems to be more on yield curve management, given the massive government borrowing program in FY22. Its announcement of new liquidity measures and extension of a few indicates that monetary policy normalization might be delayed and be more gradual than earlier expected.

Rising COVID-19 cases a cause for grave concern; management of the yield curve a major focus

* Minutes of the MPC meeting held between 5th Apr’21 and 7th Apr’21 reveals that the members view the sudden spike in COVID-19 cases since Mar’21 as the single biggest risk to the ongoing economic recovery. According to Shaktikanta Das, Governor, RBI, "The need of the hour is to effectively secure the economic recovery underway so that it becomes broad based and durable. The renewed jump in COVID-19 infections in several parts of the country and the associated localized and regional lockdowns adds uncertainty to the growth outlook.”

* Going forward, success of vaccinations, universal adoption of preventive measures to severely limit the chances of transmission of the virus, and investment in health services to assure access to health care will define the course of the economic recovery.

* As part of the MPC’s liquidity management strategy for FY22, the members believe the broad objective would be to ensure an orderly evolution of the yield curve and to avoid volatility in the G-Sec market.

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