The Reserve Bank of India’s (RBI’s) policy comes at a critical time when the economy is in the midst of a confused lockdown with different perspectives on growth and a definite direction for inflation. The monetary policy committee (MPC) has reiterated in the past the accommodative stance, and hence the takeaway is that there are few chances of the repo rate being increased in the near future. Some of the important signals provided are the following. First, is the outlook on growth and here the RBI has scaled down the forecast to 9.5 per cent, which is now closer to what most analysts have done (CARE is 8.8-9 per cent). A single-digit growth sounds less attractive than a double-digit one. In fact, the rate would be declining over the quarters sequentially. Therefore, this also supports the MPC view that growth is weaker than expected and hence requires support from the monetary authority. The second view is on inflation, which is still unchanged at 5.1 per cent for the year. This may have to be scaled up given that a major concern today has been the increase in global commodity prices, which is not just metals but also oils--edible and fuel. The World Bank has spoken of sharp increases this year, which has already been witnessed in the WPI last month (though admittedly the low base played its role). There is also a bet that the food prices will remain stable with a good monsoon forecast.
Third, is on liquidity. This has been a major driving factor in the system with different liquidity inducing measures being announced even in May. The RBI has kept up the pace with the measures announced this time, too. A flag that needs to be raised is that the special long-term repo operation (SLTROs) have not elicited a response from the banks as only Rs 400 crore was picked up in the first auction. There is an addition of Rs 15,000 crore for the high contact sectors like hotels, tourism etc., which is very much required and more likely to be successful as this segment has been buffeted twice. As most would fall in the SME category, this will be useful. The second phase of the government securities acquisition programme (GSAP 2.0) was more or less on expected lines, as the RBI will continue to buy more paper to support the system. Interestingly, the government would also be borrowing around Rs 1.5 trillion more this time to compensate states for shortfalls in GST collections. Hence the total of Rs 2.2 trillion of GSAPs in H1 will help to support this operation.
On liquidity, the RBI appears to be persevering with its dual objectives. The first is to keep the system in surplus even after meeting all requirements from borrowers. This has been done successfully all through the last year and this year so far given the large daily flows to the reverse repo auctions. The other is to actually work on the yields curve to ensure that it remains well behaved. This also means that yields will remain low which serves the government’s interest as there is a large borrowing programme that has to be facilitated this year. These measures will definitely meet this objective. The 10-years bond yield will hence continue to be in the region of 6 per cent. A point flagged by the RBI has been on paying attention to the compulsion of provisions by banks and capital buffers. This could just be indicative of some concern on the possible increase in stressed assets this time due to the lockdown on account of the second wave. The market reaction has been quite stoical. There is not much change in the frontline indices: currency is still at around 73 and 10-year yield just crossing 6 per cent.
Business Standard, 4th June 2021.
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