RBI MPC August 2021: Monetary Policy meet begins; repo rate cut unlikely for 7th time in a row

Analysts expect MPC to retain the policy interest rates at historical lows. The inflation outlook for FY22 could also see a revision from the predicted levels of 5.1 per cent

The Reserve Bank of India’s Monetary Policy Committee began its bi-monthly deliberations on Wednesday, 4 August 2021, amid expectations of keeping repo and reverse repo rates unchanged on the back of the fear of the third COVID-19 wave. The monetary policy outcome will be announced on Friday, 6 August 2021. Analysts expect MPC to retain the policy interest rates at historical lows. The inflation outlook for FY22 could also see a revision from the predicted levels of 5.1 per cent. Moreover, the RBI MPC is also likely to keep the policy accommodative, maintaining comfortable liquidity in the system. The RBI had kept key interest rates unchanged at the last MPC meeting held in June this year. The repo rate was kept at 4 per cent and the reverse repo rate at 3.35 per cent.

Repo, reverse repo rates to remain at historic lows; Inflation outlook for FY22 could see a revision

Key policy rates i.e., repo and reverse repo rate to be retained at historical lows. The accommodative monetary policy stance would be maintained as the RBI stays focused on economic revival. With the domestic economic landscape being fraught with uncertainties, there is a strong case for continued policy support. No new liquidity measures are expected. The existing measures can be extended in terms of duration and coverage of segments.

The inflation outlook for FY22 could see a revision from the forecasted 5.1%. The RBI assessment and outlook on inflation would be keenly watched for signals on the continuation of its loose monetary policy stance. The GDP growth outlook for FY22 is unlikely to be revised (from 9.5%). There could be an increase in the quantum of OMO purchases under the GSAP programme for the remainder of the year (to more than Rs. 1 lakh crores in each of the remaining three quarters) aimed at cooling down bond yields.

Madhavi Arora, Lead Economist, Emkay Global Financial Services: The upcoming policy will see MPC re-emphasising its commitment to keeping policy accommodative for the foreseeable future and maintaining comfortable liquidity. The recent inflation surprises will unlikely to derail their narrative, especially with inflation ahead likely falling back to sub 6% — within their flexible target. The MPC will likely maintain that growth is still sub-par — needs consistent firm traction and continued policy support is crucial for durable growth revival. We do not see any split in the voting pattern on the accommodative stance.

We reckon the RBI will continue to strive fixing artificially skewed yield curve and maintain its preference for curve flattening. We expect the RBI to get more accountable and action oriented as we move into 2HFY22. We maintain that RBI may have to stretch GSAP/OMOs beyond Rs4.5tn+ to manage impending SLR demand-supply mismatch.

Deepthi Mathew, Economist at Geojit Financial Services: The MPC would likely continue with the accommodative stance and maintain the rates unchanged as the economy is still in the recovery phase. The fear of the third wave would also force the RBI to continue with the growth-supporting measures. However, the rising inflation rate in the domestic economy is a worry. And, one needs to closely whether there will be an indication of the normalization of monetary policy.

Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company: While this MPC meeting is widely expected to be a non-event status quo, the market will be keenly watching for forward guidance on future policy normalisation. In particular any RBI action on fine-tuning banking system liquidity as well as any further steps towards ongoing “orderly evolution of yield curve” will be the key determinants of interest rates going forward.

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research: There is a consensus in the markets that MPC will continue with its accommodative monetary policy given the continuing uncertainty on the growth momentum and the threat of another wave of the Covid pandemic. We don’t expect any action on interest rates or any major step towards recalibration of systemic liquidity at this point in time. The combination of elevated commodity prices, Covid related disruptions, vaccination progress, and policy support-led economic revival has resulted in an acceleration in inflation in most countries including India.

The benchmark CPI inflation in India has remained above 6.0% over the months of May and June and is likely to remain sticky in the near future. However, a strong Kharif crop output led by a favorable monsoon and the easing of supply bottlenecks from a taper down of the pandemic may partly cool down the inflationary pressures from Q3FY22. With steady progress on vaccination and the pickup in aggregate demand, we expect RBI to start normalizing the policy corridor from Dec-21 onwards, followed by an eventual hike in the benchmark repo rate in Q1FY23. We continue to stick to our 10Y g-sec yield forecast of 6.15% by Sep-21 and 6.50% by Mar-22.

Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund: The MPC meets at the cusp of a visibly sticky inflation, nudging growth phase and a fluid pandemic situation world over. The central banker is mostly likely to maintain a status quo on rates being mindful of growth and wait for more data points on the inflation front. There could be some steps towards normalisation of liquidity via increased tenor and/or quantum of VRRR (variable rate reverse repo) – something which bond markets seem to be anticipating.