RBI MPC outcome: Here’s what economists and market experts said after RBI kept rates unchanged

The central bank's decision to keep rates unchanged for the fifth consecutive time is in line with the economic need to encourage growth, experts said.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday kept the repo rate unchanged at 4 per cent while maintaining an ‘accommodative stance’. The reverse repo rate was also kept unchanged at 3.35 per cent following a unanimous decision by the six-member committee headed by RBI Governor Shaktikanta Das.

Following the RBI MPC outcome, the benchmark equity indices ended higher with the S&P BSE Sensex rallying 460.37 points (0.94 per cent) to finish at 49,661.76 and the broader Nifty 50 advancing 135.55 points (0.92 per cent) to end at 14,819.05.

The central bank’s decision to keep rates unchanged for the fifth consecutive time is in line with the economic need to encourage growth, experts said.

Here’s what various economists and market experts had to say about the RBI MPC meeting outcome:

Bekxy Kuriakose, Head – Fixed Income at Principal Asset Management, said: “All members of RBI MPC decided to keep key rates unchanged and stance as accommodative and pledged to continue to sustain growth on durable basis. Some concern has been expressed on input cost pressures which can feed into inflation particularly commodity prices and logistic risks. However overall RBI indicated that there are both downward and upward pressures on inflation reflecting their stance that they likely do not see inflation as a major concern. In this backdrop, the continuation of the FIT (flexible Inflation targeting) Regime for next 5 years is also seen as a validation of its success since the past five years and gives a good measure of policy continuity.

For the markets, the most positive announcement from the Policy was the announcement of G-SAP 1.0 signalling a move towards a more structured and orderly manner of conducting open market secondary purchases of government securities. For the first quarter of FY 22, Rs 1 lakh crore worth of purchases has been announced and an amount of Rs 25,000 cr next week itself. Thus market is now assured of regular open market operations. This bodes well for medium to long end government securities which has already seen some softening in yields today post the announcement. Other measures including extension of TLTRO on Tap scheme, Liquidity facility for all India Financial institutions, extending the PSL classification for lending by banks to NBFCs for onward lending to certain sectors and continuation of enhanced WMA (ways and means advances) limit for State governments will help to continue to provide relief in wake of renewed concerns on growth amid a surge in COVID cases.

Overall the policy is dovish and remains focused on maintaining orderly yield curve conditions as well as extending support to needy sectors. We recommend investors to continue to have a balanced asset allocation mix in high-quality short term and medium duration debt funds.”

Ram Raheja, Director at S Raheja Realty, said: “RBI expectedly kept the key rates unchanged and reiterated its accommodative stance on rates to achieve sustainable growth of the economy and its determination for control over inflation. This will continue to further foster the demand for housing. Housing markets have responded well in the past to lower home loan rates, stamp duty reduction and other rebates. With inflation set to be high and economic recovery slow due to surge of COVID, residential real estate will continue to attract investment as it is a safe-haven asset.”

Sanjay Palve, Senior Managing Director at Essar Capital, said: “As we witness the second wave of Covid-19 and its implications on the economic growth and inflation, the decision to hold the accommodative stance and keep repo rate at 4% was anticipated. The country’s economic recovery is still fragile and as the external demand continues to be uncertain, RBI’s continuous support, proactive and balanced approach is what is needed to ensure liquidity. A strong vaccination and distribution programme will gradually churn the wheels of business growth and economic revival.”

Lakshmi Iyer, CIO (Debt) & Head Products at Kotak Mutual Fund, said: “The RBI MPC voted for a status quo in line with our and market expectations. The move to introduce G-SAP – secondary market GSec acquisition program is a master stroke by the RBI. This would reign in sharp spike in GSec bond yields. Introduction of long term VRRR (variable rate reverse repo) is an extension towards normalising liquidity. Liquidity surplus however will and is likely continue. We expect yield curve to flatten from the current levels with the longer end of the yield curve compressing faster than the short end.”

Rajani Sinha, Chief Economist & National Director – Research at Knight Frank India, said: “The RBI has taken reassuring steps to infuse additional liquidity into the housing sector through the interventions of increased financing to National Housing Bank and extension of priority sector tag for bank funding to NBFCs for housing loans.

However, given the inflationary concerns in recent months, RBI has maintained the status quo on key policy rates. At a time when rising second wave of COVID infections and subsequent lockdowns are derailing economic momentum, RBI interventions will help maintain adequate liquidity as well as prevent hardening of yields in bond market. These measures will ensure economic stability as well as keep real estate sector stay afloat during such precarious times. Hopefully, benign retail inflation on account of better monsoon and easing of crude oil prices, coupled with accommodative stance would translate into lowering of policy rate in near future.”

Anuj Khetan, Director at Vijay Khetan Group, said: “Keeping in mind the recent surge in the COVID-19 cases and the restrictions imposed, the monetary policy committee’s decision to keep key rates unchanged at 4% was on expected lines. This move is a much-appreciated step recognizing the role of the real estate sector in generating employment and economic activity. The Union Budget 2021-22 also has provided a strong impetus in favour of the real estate sector. With the interest rates at a record low, the Government will continue taking affirmative measures as long as it is necessary to revive the economy and mitigate Covid-19 impact. With stamp duty reversed back to 5% and real estate sales on the upside, it would boost the banks to further transmit interest rate reduction to end-users to provide further more incentive to renters to eventually turn into homeowners.”

Dhiraj Relli, MD & CEO at HDFC Securities, said: “The outcome of the MPC meet was on expected lines as far as repo rates and stance are concerned. However, the announcement of secondary market G-sec acquisition programme (G-SAP 1.0), where the RBI will commit upfront to a specific amount of open market purchases of government securities with a view to enable a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions, was a positive surprise. This shows the resolve of the RBI to keep Gsec rates under check despite the large borrowing program. The endeavour will be to ensure congenial financial conditions for the recovery to gain traction. The large amounts committed in Q1 and in April show the seriousness of the RBI in implementing the Gsec program.

The markets have reacted well to this measure as this will result in rates not rising and, in fact, easing down for businesses. The impact of the MPC announcements however will wither away in a couple of days time and the markets will keep responding to other triggers including Covid progress and corporate results.”

Bhushan Nemlekar, Director at Sumit Woods Limited, said: “The RBI’s decision to maintain its accommodative stance was on the expected lines in light of the recent resurgence of Covid-19 infections and its potential to cause the on-going economic recovery to stumble. The prevailing low home loan rates are already enticing for homebuyers. It’s a high time bank needs to pass on the benefits to the homebuyers. With auspicious occasions like Gudi Padwa and Akshaya Tritiya already round the corner, the real estate sales are expected to be further driven by developer discounts and flexible payment plans.”

Amar Ambani, Senior President and Head of Research – Institutional Equities at YES Securities, said: “With Bond markets pricing in a status quo well in advance, MPC barely surprised in terms of accommodative stance. All the members of the MPC unanimously voted for no change in policy rates. The central bank reiterated its FY22 real GDP growth projection of +10.5%, while sees inflation trajectory to hover around 5% in H1 FY22. RBI vehemently articulated that that absorption of excess liquidity through reverse repo should not be construed as reversal of accommodative policy stance. RBI governor expressed the need for orderly evolution of yields and will initiate 1 trillion of OMOs during Q1 FY22 to combat extreme volatility. RBI’s liquidity support will certainly help in assuaging market apprehensions given that supply of G-Sec paper will remain elevated on the back of frontloading of market borrowing. For FY22 as a whole, OMO operations are expected to be above INR 3 trillion, similar to FY21 level. Possibility of inclusion of Indian G-secs in the global bond indices will also absorb the supply. Nevertheless, we expect 10year yields to inch higher, possibly trade in the range of 6.2-6.25% in the near term, as there are concerns over stubborn core inflation, resurgent COVID infections, renewed localized lockdowns and relatively higher sovereign yields in US.

Additional measures announced that are positive for smaller HFCs, NBFCs and MFIs were on-tap TLTRO scheme extended by 6 months and additional liquidity support of 500 billion to AIFIs. Key beneficiaries of these measures could be Can Fin, Repco, Home First, Shriram City and MFIs like CREDAG and Spandana.”

Abheek Barua, Chief Economist at HDFC Bank, said: “The RBI policy was more dovish than expected with the central bank recognising the risks associated with the rising infection cases in the county and continuing its support for growth through a number of measures including its commitment to keep liquidity in surplus and an extension of measures like the on-tap TLTRO. Fears of any pre-mature tightening either through rates or liquidity management by some sections of the market have been put to rest by RBI’s dovish tone today. The governor was for instance categorical that the changes in liquidity measures announced today does not constitute tightening.

The focus of the policy was clearly on yield management and the announcement of the G-sec acquisition program (GSAP 1.0) is likely to stabilise and support long term yields. Although, the extension of tenures for the VRRR (variable rate reverse repo auctions) might lead to some hardening at the short-end of the curve. The upward revision of the inflation forecast by the RBI is justifiable given rising commodity prices, although we see further upside risks to the current forecast range. That said, inflation is unlikely to be an area of concern for the RBI for the coming months and growth is likely to remain the policy priority.”

Sandeep Bagla, CEO at TRUST Mutual Fund, said: “Interest rates are likely to remain range bound going forward as RBI is committed to ensure easy liquidity and low repo rates. The increase in Government borrowings are likely to be partially offset by RBI OMOs and secondary market purchases of Government securities. Inclusion of government securities global bond indices will add to the demand. Corporate bond spreads are likely to remain at moderate levels on back of restrained supply and continued demand from institutional investors. Unless inflation expectations start increasing in the future, fixed income investors will do well to remain invested in Indian bonds”

Nitin Shanbhag, Head – Investment Products at Motilal Oswal Private Wealth Management, said: “While a status quo in terms of policy rates was factored in, the big positive has come in terms of the transparency of the OMO calendar through the G-sec acquisition programme (GSAP), which is likely to support and stabilize long term yields. In this regard, RBI has announced GSAP of Rs. 1 lakh cr in 1Q FY22, of which Rs. 25,000 cr would be conducted on 15th April’21. This has provided some relief to the 10-year g-sec yield.”

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said: “The monetary policy announcement is on expected lines without changes in policy rates and stance. However, reading between the lines, one can conclude that the stance is more dovish than expected with the governor reinforcing the central bank’s commitment “to remain accommodative to support & nurture the recovery as long as necessary”. The bond market has taken the announcement positively with the 10-year yield moving to 6.12%. The governor’s assurance to ensure an orderly evolution of the yield curve also is confidence-inspiring”

S Ranganathan, Head of Research at LKP Securities, said: “RBI kept rates unchanged as expected and will continue with its accommodative stance to mitigate the impact of the Pandemic. An increase in the pace of vaccination and rural demand would in our view help growth”

Deepthi Mathew, Economist at Geojit Financial Services, said: “It was in the expected line as the MPC kept the rates unchanged. Though the governor assured of maintaining the accommodative stance as long as the economy recovers, he also cautioned about the factors that could push up prices. One of the highlights in today’s statement was the announcement of G-sec acquisition program 1.0, which the bond market needed the most. It could help in the cool off in bond yields and support the government’s market borrowing program”

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