RBI Monetary Policy Updates: Covid Second Wave Impact Likely to be Restricted in Q1, Says RBI Guv

Dinesh Khara, chairman, SBI

“The policy announcements of the RBI are clearly focused on extending liquidity support to stressed sectors by a more equitable distribution. The growth and inflation numbers have been revised looking at the current uncertain environment. The policy announcements are unequivocal in supporting growth through liquidity and market interventions through Regional Rural Banks and also by fast tracking resolution of stressed MSME sector. Overall, the coordinated and active efforts of the RBI and Government will support growth on a more durable basis during these difficult times.”

M Govinda Rao, chief economic advisor, Brickwork Ratings

“The decision to hold the policy rates by the MPC is on expected lines and there are no surprises. On the GDP guidance, the RBI lowered its forecast to 9.5% from 10.5% for FY22. On inflation, the RBI sees a slight hardening of prices in Q3 and Q4 FY22 and forecasts 5.1% inflation for FY22. The expectation of inflation moving within the MPC’s upper range provides scope for the continuation of the accommodative policy stance for the near term. Although the RBI has lowered its GDP forecasts, the expectation of 18.5% growth for Q1FY22, brings some optimism.  Overall, the MPC’s growth and inflation estimates seem credible with an upward bias in the former, and the assurance of continuation of accommodative stance to support and nurture the growth recovery, while assuring to keep the interest rate low," M Govinda Rao, chief economic advisor, Brickwork Ratings said. 

Shishir Baijal, chairman and managing Director, Knight Frank India

"We welcome the RBI’s move to maintain status quo on key policy interest rates. Although expected, the RBI has continued its growth supportive policy stance. Additional measures to enhance liquidity support to most vulnerable touch sensitive sectors and small businesses; and expanded credit exposure limit for resolution is a great move. As the nation attempts to recover from the second wave of pandemic, there is a dire need to provide monetary policy support - on account of both easy availability and lower cost of funds - to households and businesses alike. Besides the monetary policy intervention, as we come out of graded regional lockdowns and further resume economic activities, there is a greater need to provide adequate fiscal support to jump start consumption demand. Demand stimulant measure like credit subsidy or tax waivers even for a limited period can play a transformative role until we reach the pre COVID-19 normalcy thresholds," said Shishir Baijal, chairman and managing Director, Knight Frank India.

Impact is Expected to be Relatively Contained in the Second Wave: RBI Guv 

The second wave of COVID-19 is associated with unexpectedly higher rates of morbidity and mortality relative to the first wave. The break out of mutant strains that render the virus highly transmissible across both urban and rural areas has led to fresh restrictions on activity being imposed across a large swath of the country. Yet unlike in the first wave, when the economy came to an abrupt standstill under a nation-wide lockdown, the impact on economic activity is expected to be relatively contained in the second wave, with restrictions on mobility being regionalised and nuanced. Moreover,people and businesses are adapting to pandemic working conditions.

"Since the MPC’s April meeting, the second wave of COVID-19 has surged across several states and spread into smaller towns and villages, leaving a trail of human misery and tragedy in its wake. Yet in these days of trials and travails, it is vital to remain focused on vanquishing the virus," said RBI Governor Shaktikanta Das. 

Inflation Print for April at 4.3 per cent has Brought with it Some Relief: Shaktikanta Das

"The inflation print for April at 4.3 per cent has brought with it some relief and policy elbow room. A normal south-west monsoon along with comfortable buffer stocks should help to keep cereal price pressures in check. On the other hand, the rising trajectory of international crude prices within a broad-based surge in international commodity prices and logistics costs is worsening cost conditions," RBI Governor Shaktikanta Das. 

Rohit Poddar, Managing Director, Poddar Housing and Development Ltd

“With the mutated second wave and the fear of the third wave, the apex bank's decision to keep the repo rate unchanged at 4% reflects the continuation of its accommodative stance ensuring the lowest lending rates to keep business operational across sectors. The policy has been in line with the market expectations, the only difference is G-sap being shared with SDLs," said Rohit Poddar, managing director, Poddar Housing and Development Ltd. 

Madhavi Arora, lead economist, Emkay Global Financial Services

"The MPC expectedly stayed on hold and emphasized its commitment to keeping policy accommodative and maintaining ample liquidity as long as necessary. This more state-led guidance hinges on growth revival becoming durable. The 100bps downgraded FY22 growth forecast to 9.5% was accompanied with acknowledgment of rising uncertainty amidst COVID second wave and localized lockdowns, while inflation is seen at 5.1% for FY22, broadly same as last policy," said Madhavi Arora, lead economist, Emkay Global Financial Services. 

Binod Modi, Head strategy at Reliance Securities

MPC meeting outcome was mostly in-line with expectations as RBI, in addition to maintaining status quo about policy rates, focused upon ensuring sufficient liquidity in the system and supported MSMEs and corporate hit in second wave. Special liquidity of Rs160bn for SIDBI to support SMEs and increased on-tab liquidity support of Rs150bn to banks for offering three years tenor of loan to contact-intensive sector augur well to spur economic activities in coming months. Further, incremental bond purchase of Rs400bn on 17th June’21 under G-SAP 1.0 and Rs1.2 trillion in 2QFY22 under G-SAP 2.0 augur well. In our view, reduction in real GDP target for FY22E from 10.5% to 9.5% was mostly on expected line. However, moderate increase in inflation target could be a near term overhang, but it remains under RBI’s reference range.

RBI MPC Decided to Continue with the Accommodative Stance as Long as Necessary

The MPC also decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.

Key Interest Rates Have Been Kept Unchanged

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (June 4, 2021) decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent. Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.

Real Estate Sector Praises RBI MPC Decisions

"We thank the RBI for continuing with their accommodative stance. The second wave of the pandemic and intermittent lockdowns across major cities has led to economic uncertainties across the country. There is also uncertainty around the vaccination and the increasing input costs is having a catastrophic impact on the survival of few businesses. Therefore we urge the Central Government to address the deteriorating health of MSMEs and various other sectors which have been severely impacted by the second wave of the pandemic," said Pritam Chivukula, co-founder and director, Tridhaatu Realty said. 

Big measures for MSMEs

-Special liquidity facility of Rs 16,000 crore for MSMEs via SIDBI For 1-year at repo rate

-Exposure Threshold Under Resolution Framework 2.0 Increased to Rs 50 crore from 25 crore for MSMEs

Another Operation Under G-SAP 1.0 Will Conducted on June 17

G-SAP operation worth Rs 40,000 crore in G-Secs will be carried out, said RBI Governor Shaktikanta Das. Of this, Rs 10,000 crore will constitute purchase of State Development Loans. 

RBI Forecast Normal Monsoon

Forecast of normal monsoon and resilience of agriculture and farm economy will provide tailwinds to growth revival: RBI Governor Shaktikanta Das

RBI MPC reduced FY22 GDP forecast to 9.5% from earlier estimate of 10.5%. The Q1FY22 GDP forecast has been slashed to 18.5% from earlier estimate of 26.2%, said RBI Governor Shaktikanta Das. 

Policy Support From All Sides is Required: Das

RBI's Monetary Policy Committee was of the view that at this juncture, policy support from all sides is required, says Governor Shaktikanta Das.

MPC to Continue with Accommodative Stance: Shaktikanta Das 

The RBI's Monetary Policy Committee (MPC) has decided to continue with accommodative stance until necessary to mitigate impact of COVID-19. The Marginal Standing Facility (MSF) rate and bank rates remain unchanged at 4.25 percent, says RBI Governor Shaktikanta Das. 

RBI MPC Keeps Rates Unchanged

RBI MPC keeps repo rate unchanged at 4%, reverse repo rate at 3.35%, announces RBI Governor Shaktikanta Das. 

RBI Governor Shaktikanta Das starts MPC announcement

RBI Governor Shaktikanta Das starts MPC announcement. This will be the second monetary policy of this fiscal.

What Real Estate Sector Wants 

Amid concerns over inflation and continued uncertainty in the backdrop of the second covid wave, the RBI is likely to keep the benchmark interest rates unchanged in its upcoming monetary policy review. Rightly so, there is heightened risk of inflation due to higher input costs and also increased petroleum prices. This inevitably will constrain the MPC in taking any rate-related action.That said, since the second wave has once again impacted several sectors including real estate, it is therefore imperative that the RBI enhances liquidity into the system. It will help the real estate sector sail through the current crisis and thereby help towards the growth of the economy at large, said Anuj Puri, chairman - ANAROCK Property Consultants.  

Niranjan Hiranandani, National President of NAREDCO

"The central bank is likely to maintain an accommodative stance. The second wave of the COVID-19 pandemic has impacted the economy; there is a need to enhance liquidity in the system, especially for stressed industries. Due measures to ensure banks do not get any more non-performing assets (NPAs) need to be taken up, including moves related to the Insolvency and Bankruptcy Code (IBC)," said Niranjan Hiranandani, National President of NAREDCO. 

RBI mainly factors in the CPI while arriving at its monetary policy

The government has retained the inflation target at 4 per cent with the lower and the upper tolerance band of 2 per cent and 6 per cent, respectively, for the next five years (April 2021 - March 2026). Retail inflation, based on Consumer Price Index (CPI), slipped to a three-month low of 4.29 per cent in April mainly on account of easing of prices of kitchen items like vegetables and cereals. The RBI mainly factors in the CPI while arriving at its monetary policy.

Mridul K Saggar, one of the MPC members, said the economic recovery can come under risk if the new wave of infections is not flattened soon. “This is especially so as monetary and fiscal policies have already used most of their space to considerably limit loss of economic capital, though expansion of policy toolkits can still afford additional comfort,” Saggar said. Further, learning effects on calibrating stringency of restrictions may keep economic costs of the second wave much lower than the first but still retard full normalisation by a quarter or two, Saggar pointed out. “Ramping up vaccination, testing and treatment holds the key to protecting economic recovery and health policies have become the first line of defence. Monetary and fiscal policies can only play a second fiddle,” Saggar noted.

RBI Likely to Keep Interest Rates Unchanged 

The key lending rate — the repo rate are likely to continue at 4 per cent and the reverse repo rate or the central bank's borrowing rate will be at 3.35 per cent. 

Rumki Majumdar, economist, Deloitte India

"RBI may decide to go with the status quo and maintain an accommodative monetary policy, instead of any further rate cuts. One, intermittent lockdowns are resulting in logistics and inventory challenges. At the same time, commodity prices such as iron and steel are at an all-time high and crude oil prices are likely to increase further as global demand recovers and OPEC decides to cut production. All these will increase production costs. Post economic revival, pent-up demand will further result in demand-push inflation. In other words, there are significant upward pressures on prices in the near term," said Rumki Majumdar, economist, Deloitte India

India's Growth forecasts
Most growth forecasts for the Indian economy are now in single digits. Most recently, rating agency Moody’s pegged India’s GDP growth in FY22 at 9.3%.

Ranen Banerjee, PwC India

Ranen Banerjee, PwC India Leader (Economic Advisory Services): The heightened risk of inflation, owing to the higher input costs and petroleum prices, will constrain the MPC in taking any rate-related action. We are in for a long pause with open market operations as a tool that will be employed more frequently towards keeping the 10-year yields close to six percent.

RBI MPC on June 4: When and Where to Watch

Reserve Bank of India tweeted: Watch out for the Monetary Policy statement of the RBI Governor  @DasShaktikanta at 10:00 am on June 04, 2021 YouTube:  https://youtu.be/adn3YQ2iqIA. Post policy press conference telecast at 12:00 noon on the same day. YouTube: https://youtu.be/kbY0_YqILoo

More enablers from RBI may be announced: Yes Bank Chief Economist

"The room available for traditional monetary policy is increasingly becoming constricted. In the absence of any further opportunity to cut rates, we expect the RBI to continue to use its balance sheet to keep financial market conditions easy," said Yes Bank chief economist.  

Further measures from the RBI could include:

1) More flexibility to banks to implementing restructuring plans in light of the hit to the economy due to the second COVID wave.
2) Similar to the COVID loan book for healthcare related sectors, the RBI can expand the scope for incremental lending to MSME and small businesses and an equal amount can be placed with the RBI at 25 bps lower than the repo rate.
3) Reduction in risk weights on bank lending to NBFCs/MFI that exclusively lend to MSMEs and small businesses.