Monetary Policy Key Highlights And Reactions: From Interest Rates To Lata Mangeshkar, Mahatma Gandhi
Did interest rates change today? Why not?
India's Monetary Policy Committee decided to leave benchmark interest rates unchanged and belied expectations of a change in its 'accommodative' stance. This is the tenth meeting in which the MPC has maintained a status quo.
RBI Governor Shaktikanta Das reiterated, in the press conference that followed the MPC announcement, that there is no reason to tamper with rates while stance remains accommodative.
In short, the MPC and central bank have chosen to emphasise the continued need to support India's economic recovery and growth while assessing that inflation is unlikely to be a threat big enough to warrant a quick change in its dovish stance.
"Aaj phir jeene ke tamana hai"—Das turned to a popular song of late singer Lata Mangeshkar to express hope of a strengthening recovery.
He also quoted Mahatma Gandhi—"Satisfaction lies in the effort. Full effort is full victory."
Key Highlights From RBI Monetary Policy
Main Decision
Unchanged: Repo rate at 4%, reverse repo rate at 3.35%. Accommodative stance maintained.
Economy Estimates
FY23 real GDP growth projection: 7.8%
FY23 CPI projection: 4.5%
Liquidity Measures
14-day VRR and VRRR main liquidity management tools
On-tap liquidity windows extended till June 30
Limit for FPI flows into bonds via voluntary retention route raised to Rs 2.5 lakh crore
Digital Money
e-RUPI voucher limit raised to Rs 1 lakh
Investors in cryptocurrencies must remember that they are investing at their own risk
Have been working on a CBDC for the last 18-24 months. Cannot introduce CBDC in haste.
Key Reactions From Economists
Today's policy decision indicates it's likely, though not necessary, that India is at least one more MPC meeting away from any rate change. Some economists have pushed back their expectations to the August meeting.
Abheek Barua: The RBI is likely to follow a gentle approach to the normalisation
Monetary policy decision on expected lines, said Abheek Barua, chief economist of HDFC Bank. It’s tilted towards growth and assesses that inflation is on a downward trajectory, he said.
“This was the first policy of the calendar year and perhaps sets the tone for the rest of the year. Were that indeed the case, the RBI is likely to follow a gentle approach to the normalisation and ultimately withdrawal of monetary support unlike Western central banks that have switched to a hyper-aggressive mode. This is consonant with the growth and inflation dynamics specific to India.”
Rahul Bajoria: Now expect repo rate hikes to only begin from Q3 2022
Given the clear reluctance to pull back policy support, “we push back our rate hike forecasts to Q3 2022”, said Rahul Bajoria, chief India economist at Barclays.
“We think such dovish messaging on inflation makes it difficult to envisage the RBI hiking rates in the near term. While the RBI may choose to normalise the policy corridor over the next six months, we now expect repo rate hikes to only begin from Q3 2022 (August meeting), with risks of further delays. We still expect policy rate hikes of 50bp, which would push the repo rate to 4.5% by end-2022, with the reverse repo rate likely rising to 4.25% by that time.”
Pranjul Bhandari: Expect a 40 bp reverse repo rate normalisation over the next meeting or two
We believe inflation pressures are higher than the RBI is estimating, said Pranjul Bhandari, chief India economist at HSBC.
"As such, we think the RBI should start normalising rates quickly. We continue to expect a 40 bp reverse repo rate normalisation over the next meeting or two, followed by a change in stance to normal and two repo rate hikes in 2022, taking the repo rate from 4% now to 4.5% by end-2022. We expect two more repo rate hikes in 2023, taking the repo rate to 5% by end-2023.
DK Joshi: We expect the RBI to start normalising its policy rates by April
Through today’s policy, the RBI showed domestic factors remain its primary concern, and that it can chart a different policy trajectory relative to other advanced economies such as U.S., said Crisil Chief Economist Dharmakirti Joshi.
"However, domestic inflation, too, could face upside risks from surging crude oil prices. In addition, firms can increase pass-through of cost pressures to consumers as demand strengthens over the coming year.
Thus, we expect the RBI to start normalising its policy rates by April. We expect three hikes in repo rate by 25 basis points each, bringing it to 4.75% by the end of fiscal 2023. That will still be lower than 5.15% seen just before the pandemic (February 2020).”
Indranil Pan: Predicting a timeline is difficult at this point.
The RBI has provided the market with a very dovish policy –more so than expected by market, said Indranil Pan, chief economist at Yes Bank.
"For now, the RBI has decoupled itself with the monetary policy momentum in the rest of the world, where higher inflation prints are leading to central banks of the developed economies to tighten rates. We believe that RBI may be able to hold back repo rate increases for longer and may not have any compulsion to follow global central banks unless their actions have any severe implication on the U.S. dollar/Indian rupee rates. We foresee 2 repo rate increases in FY23 but predicting a timeline is difficult at this point."
Aditi Nayar: Continue to expect the 10-year yield to cross 7.0% in April 2022
The tone of the policy review appeared sanguine on domestic inflation and cautious on growth, said Aditi Nayar, chief economist at ICRA.
“With the governor dousing fears of premature tightening and no additional MPC member voting for a stance change, a shift to a neutral stance in April 2022 appears to be ruled out, unless the CPI inflation exceeds the upper threshold of 6.0% in both January and February 2022. The MPC's forecast of a 4.3-4.5% GDP growth in H2 FY2023 belies conviction in a back-ended pickup in growth driven by government and private capex.”
"We continue to expect the 10-year yield to cross 7.0% in April 2022," Nayar said.
“With the tone being more dovish than expected leading to a back-ending of rate hike expectations, and the comeback of the reference to an orderly evolution of the yield curve, the 10-year G-sec yield cooled back to pre-budget levels. We continue to expect the 10-year yield to cross 7.0% in April 2022, once the FY2023 borrowing programme kicks off. However, it is likely to climb more slowly thereafter, given the postponement in the likely timing of the first repo rate hike to August 2022 or later, from our earlier expectation of June 2022.”
Madhavi Arora: Some leeway to the RBI to conduct shallow normalisation
The gradualist approach toward liquidity and rate normalisation may be challenged by various global and domestic push-and-pull factors, said Madhavi Arora, lead economist at Emkay Global.
“Nonetheless, a huge bond supply in FY23 will require the RBI’s invisible hand in a more visible fashion, implying return of a pre-committed GSAPs. An uncomfortable RBI may neutralise that with CRR hikes, albeit it will face some communication challenges. We note the macro adjustment owing to changing global and domestic dynamics has so far been borne by the rates market while the FX market has been resilient. Amid ultra-elevated term premia, India’s current real rates look reasonable versus EMs, given the present crosscurrents. This could give some leeway to the RBI to conduct shallow normalisation.”
Aurodeep Nandi: The RBI is likely to remain behind the curve
Sometimes markets expect dessert, but then realise that the main course is still not over, said Aurodeep Nandi, Indian economist at Nomura.
“…the RBI surprised by not only doubling down on its now familiar orthodoxy of keeping rates and stance unchanged, but also expressed a very dovish outlook for inflation for FY23, forecasting it at 4.5%. This comes despite higher oil and commodity prices, growth-supporting fiscal policy, continued economic normalisation, and a distinctly hawkish Federal Reserve. This suggests that the RBI is likely to remain behind the curve, until macro circumstances warrant a shift of gears.”
Sunil Sinha: The RBI has done the right thing
India Ratings and Research expected continuation of accommodative policy stance, said Sunil Sinha, principal economist.
“…given that the economy is still not out of the woods, and the union government has already reaffirmed its commitment to support the ongoing recovery via fiscal push, the RBI has done the right thing to continue with its accommodative policy stance and maintain a status quo on the policy rates.”
Bond Market Reaction
The 10-year government bond yield dropped to 6.75% while the MPC decision was being announced by governor Das. It fell further to 6.68% soon after his press conference later in the day but then recovered to above 6.73%.
Arvind Chari: Liquid funds remain a good way to play this interest rate tightening cycle
MPC statements and the comments from the RBI governor are “needlessly dovish”, said Arvind Chari, chief investment officer at Quantum Advisors.
“For now, this delay in rate normalisation would mean that bond markets will rejoice for a while. Long-term bond yields are back towards pre-budget levels. Todays’ outcome is even better for the short to medium term segments as that was more susceptible to any changes in the RBI liquidity and interest rates policies. For the medium to longer end of the bond markets, it is back to watching oil prices, U.S. treasuries and the weekly demand/supply situation in the auctions.”
Chari said he continues to expect the RBI will move policy stance to ‘neutral’, move operational policy rate to repo rate and hike it by 100 bps by March 2023.
“Liquid funds remain a good way to play this interest rate tightening cycle. Given the steepness of the yield curve, there are opportunities at some segments of the government bond yield curve. If you have a time horizon of three years+, then a combination of liquid fund and say a dynamic bond may work well over locking in at current rates in fixed deposits, provided you gradually increase your allocation to dynamic/long term bond funds on every rise in market yields in the coming year.”
Suyash Choudhary: The opportunity loss in holding cash now is higher
With market expectations of a repo rate hike now getting reasonably pushed back, the demand for carry likely comes back, said Suyash Choudhary, head of fixed income at IDFC AMC. This is getting reflected already in the bull-steepening of the yield curve today, his note mentioned.
"Thus, a bar-bell strategy that over-weights the 4 – 5 year (our preferred overweight segment) gets extra appeal post this policy. Put another way, even with some mark-to-market volatility assumed, the opportunity loss in holding cash now is higher given the expectation of further delayed repo rate hike after this policy. Longer duration bonds (10 year and beyond) however, still don’t have a definitive trigger and will have to await a more sustainable resolution of the medium term demand-supply equation for bonds.
Given the above, we reiterate our preference for overweight stance in the 4 – 5 year government bonds."
Expert comments are compilations of media statements and research reports.
