The ever optimistic Reserve Bank of India Governor Shaktikanta Das invoked a song by the late singer Lata Mangeshkar along with a quote from Gandhi to give an extra dose of comfort to the market while announcing the monetary policy committee's decision on Thursday.
The MPC surprised the market with its unanimous decision to keep the reverse repo rate unchanged, despite expectations that the central bank would raise the rate to absorb excess liquidity.
The MPC felt that there is a need for continued policy support to economic recovery, given the uncertainties related to Omicron and global spillovers. This was in contrast to the decision of other central banks which have started tightening the policy to tame inflation.
The MPC however was split over its decision to continue with an accommodative policy stance with one member Jayant Varma voting against it.
Reverse repo rate was therefore left unchanged at 3.35% and repo rate at 4%.
That said Governor Das pointed out that RBI has managed to increase the effective reverse repo rate to 3.87% from 3.35% in August last year through its liquidity operations, without having to formally hike policy rate.
“Overall, taking into consideration the outlook for inflation and growth, in particular the comfort provided by the improving inflation outlook, the uncertainties related to Omicron and global spillovers, the MPC was of the view that continued policy support is warranted for a durable and broad-based recovery,” said RBI Governor Shaktikanta Das.
The market was also surprised by the MPC’s decision to sharply reduce its inflation guidance for the next fiscal year to 4.5%. The committee expects consumer price inflation to fall from 5.7% in March 2022 to its 4% target by December 2022.
The MPC was of the view that vegetable prices are falling and the Rabi harvest has been strong. While core inflation or the cost of goods and services excluding food remains elevated, it is not led by demand pressures. The rise in oil prices however continues to be a risk to inflation.
Das said that the upside risks to inflation remain low in India compared to other countries.
On the other hand, the MPC seems less enthused about growth and expects real GDP growth in fiscal year 2023 to be at 7.8% compared to the government’s projection of 8-8.5% in the Economic Survey. The MPC noted that there is loss of momentum in economic activity recently as seen in high frequency indicators and consumption is yet to reach the pre-pandemic level.
Given the MPC’s reluctance to pull back its support to growth, the market is now expecting repo rate hike to be pushed to the second half of next fiscal.
“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 gentler approach towards normalization and withdrawal of monetary support unlike the western central banks that have switched to a hyper-aggressive mode. This is consonant with the growth and inflation dynamics specific to India,” said Abheek Barua, chief economist, HDFC Bank.
This delay in rate normalisation would mean that bond markets will rejoice for a while. The yield on 10 year G-sec is back to pre-budget levels and closed at 6.74% on Thursday. Equity markets also cheered a no change policy with Sensex up 460 points to close at 58,926 and Nifty up 142 points to close at 17606 from previous day's close.
The bond market was however disappointed that there was no announcement on how RBI will support the massive government borrowing program next year.
Governor Das assured that the pressure on the borrowing program could be lower with reliance on small savings likely to be higher than currently projected. Moreover, he said that the gross borrowing number takes into account the off-balance sheet borrowings earlier done by some PSEs like NHAI that the Centre will instead do this year. The decision to increase the limit under the voluntary retention route to Rs 2.5 lakh crore from Rs 1.5 lakh crore earlier for foreign investors to invest in G-secs will also help support the borrowing program.
