Rates Unchanged: RBI ignores inflation, says it will support nascent growth

The central bank is of the view that both monetary and fiscal support is needed to nurture the ‘nascent and hesitant recovery’.

Reserve Bank of India (RBI) on Friday was unequivocal it would continue to bat for growth and retain its accommodative stance for as long as necessary to “revive and sustain growth on a durable basis”.

The central bank is of the view that both monetary and fiscal support is needed to nurture the ‘nascent and hesitant recovery’. To this end, RBI left the repo rate unchanged at 4% even though it upped its inflation forecast for FY22 by a chunky 60 basis points to 5.7%, describing inflationary pressures as transitory and largely driven by adverse supply-side factors.

Governor Shaktikanta Das said at extraordinary times like these when the central bank needed to address several conflicting objectives, policies needed to be nuanced rather than unidirectional. RBI also extended the date for borrowers — under the resolution framework 1.0 — for achieving specified operational parameters to October this year. Moreover, the on-tap TLTRO scheme for support to stressed sectors was pushed forward till end December.

At the same time, the central bank upped the quantum of variable rate reverse repo (VRRR) auctions to Rs 4 lakh crore by September, continuing the calibrated normalisation that began in July with the higher tolerance for bond yields. Experts, however, said the larger VRRRs should be viewed as a response to the excess liquidity in the system — roughly around Rs 8 lakh crore – rather than any strong measure to withdraw monetary policy support. They said it would give the markets time to adjust to the lower liquidity levels. Governor Das asserted the higher VRRRs should not be viewed as a reversal of the accommodative stance. Pranjul Bhandari, chief economist at HSBC India, said two developments, the occurrence and severity of the third Covid-19 wave and the pick-up in the vaccination rate, would determine the onset and the speed of the normalisation process.

Benchmark yields closed slightly higher on Friday, as the bond markets perceived RBI’s tone to be slightly less dovish than before. The dissent by one member of the Monetary Policy Committee (MPC) to the continuation of the accommodative stance as also the very sharp hike in inflation forecast left the market with the perception the unwinding could be faster than anticipated. The benchmark yield is expected to nudge 6.4-6.5% by the end of the year and short-term rates too are expected to inch up. RBI announced two GSAP auctions of Rs 25,000 crore each.

Bankers believe interest rates have bottomed out and that loan rates are unlikely to fall further. A senior banker pointed out that while demand for loans may not be spurred after the policy announcement, it would not fall either. He said interest rates on products such as home loans where the margins were small are unlike to fall further. Governor Das observed at the press conference interest rates on fresh loans had fallen by 217 basis points between February 2019 and now while for existing loans the transmission from the cut in repo rates had been 117 bps. Between March 2020 and now the transmission on fresh loans had been 146 bps while for outstanding loans it had been 101 bps.