PremiumMarkets ended marginally lower on Friday over growth and inflation fears even as the Reserve Bank of India (RBI) kept interest rates unchanged in line with expectations and announced liquidity measures to try and pump a sagging economy.
The Nifty hit a fresh record high at 15,733.60 during the day, but ended lower even though the central bank maintained its accommodative stance. The 50-share index was down 20.10 points or 0.13% at 15,670.25, while the BSE Sensex lost 132.38 points or 0.25% closing at 52,100.05.
Factoring in the impact of the second wave of covid-19, RBI lowered its growth forecast to 9.5% from 10.5%, while increasing the inflation projection by 20-30 basis points (bps) to 5.1% for FY22. “A moderate increase in inflation forecast by RBI in its policy meeting outcome today led G-sec yields increasing by 3 basis points (bps), which resulted in profit booking in banks. Increase in inflation target could be a near-term overhang, but it remains under RBI’s reference range," said Binod Modi, head of strategy, Reliance Securities.
“The markets sold off a bit, post policy, as the participants thought that the enhanced amount of G-SAP 2.0 was not enough to support markets, as inflation continues to rise and additional borrowing of ₹1.58 lakh crore on account of GST compensation will likely continue to pressure markets," said Avnish Jain, head of fixed income, Canara Robeco Asset Management Company.
“Devolvement in last few auctions has further added to overhang in the markets in past few weeks. Near-term markets will likely trade in a narrow range on RBI support via open market operations/G-SAP programme. Global cues relating to commodities, rates and any change in policy stance of major central banks will likely drive sentiment," he added.
As growth remains the policy priority for RBI, more support from fiscal authorities is needed in order to ensure a faster recovery, according to Kapil Gupta, chief economist, Edelweiss Financial Services. “While the fiscal deficit did expand meaningfully in FY21, it is expected to consolidate sharply in FY22. This may perhaps be premature, considering the second wave and its relatively large impact on the informal sector (for which fiscal policy is more effective)," he said.
Most experts believe RBI will have limited headroom to tinker with interest rates going forward.
Indranil Pan, chief economist, Yes Bank, said, “Given the current evolution of the growth-inflation dynamics, there was absolutely no scope for RBI to change its policy rates. We think that over the current fiscal, RBI will not have any leeway to change its interest rates to provide support to the economy. Instead, it will do whatever is necessary to push credit and liquidity to the stressed areas of the economy so as to prevent erosion of the supply chains in the economy."
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