RBI Monetary Policy Bi-Monthly Review 8th October 2021 – Highlights and Key Takeaways

Reserve Bank of India (RBI) governor Shaktikanta Das on Friday 8th October 2021, announced the October bi-monthly monetary policy statement. The monetary policy statement follows the three-day review meeting of the six-member MPC which had begun on Wednesday 6th October.  The MPC met on 6th, 7th and 8th October, 2021. The MPC voted unanimously to maintain status quo with regard to the policy repo rate and by a majority of 5 to 1 to retain the accommodative policy stance.

  • The central bank’s status quo on its main policy rates indicates its sustained support of growth impulses and its measures to slurp up excess money seem a little too tentative.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (October 8, 2021) decided to:

  • keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent.

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.

  • 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.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

Key Takeaways from RBI governor Shaktikanta Das' address:

— RBI will maintain accomodative stance
— Repo rate, reverse repo rate maintained at 4% and 3.35% respectively
— RBI Stops G-SAP Operations
-- It will, however, continue to conduct open market operations as needed.
— RBI has stepped up the pace of variable rate reverse repo auctions.
— The RBI has maintained the FY22 GDP growth forecast at 9.5%.
— CPI inflation is projected at 5.3% for the current fiscal year.
— Internal Ombudsman for NBFCs

This was Shaktikanta Das’s 12th statement since the onset of the pandemic, of which two were made outside of the monetary policy cycle. On two occasions- March and May, the MPC had to take pre-emptive action.

“The RBI has taken over 100 measures to proactively and decisively respond to the unprecedented crisis. We have not been a prisoner of any rule book,” Das said in his opening comments.

RBI Monetary Policy highlights:

  • RBI has further proposed to introduce framework for retail digital payment in offline mode across India
  • RBI has proposed to introduce framework for leveraging geo-tagging tech on all new & existing payment infra
  • It has been decided to introduce internal Ombudsman Scheme to address grievances of large NBFC customers, said RBI governor
  • Special 3-year LTRO of 10,000 crore for SFBs has been extended till December 31, and made available on-tap
  • The RBI has enhanced the IMPS (Immediate Payment Service) transaction limit to 5 lakh from 2 lakh
  • Variable Reverse Repo (VRR) auctions will be stepped up fortnightly from 4 trillion to 6 trillion. RBI may complement the 14-day VRR auctions with 28-day VRR auction. Liquidity absorbed in the first week of December under fixed-rate auction to be 2-3 trillion, announced the Governor
  • ‘No need for further bond-buying’: RBI stops G-SAP bond buys, Governor Das said that need for undertaking further G-SAP operations does not arise. He further added that the RBI will remain in preparedness to conduct G-SAP if and when needed. The central bank had bought 2.2 trillion through Government Securities Acquisition Programme (GSAP) in previous two quarters
  • Food inflation expected to remain muted in coming month on back of record production of foodgrains, says RBI Governor
  • Real GDP growth for Q1 of FY 2022-23 is projected at 17.2%. The projection for real GDP growth is retained at 9.5 per cent in 2021-22.
  • The GDP forecast includes 7.9% in Q2, 6.8% in Q3 and 6.1% in the fourth quarter (Q4)
  • RBI retains gross domestic product (GDP) growth target at 9.5% in FY22
  • CPI inflation is seen at 5.3% for this fiscal from earlier estimate of 5.7%
  • July-September consumer price index (CPI) inflation lower than anticipated
  • High frequency indicators suggest economic activity has gained momentum: Governor Das
  • Inflation trajectory turning more favourable than anticipated; economic activity slowly picking up: RBI Governor
  • To continue with accommodative stance to revive, sustain growth on durable basis: Governor Das
  • MPC voted unanimously for keeping interest rate unchanged and decided to continue with its accommodative stance as long as necessary to support growth and keep inflation within the target: RBI Governor Shaktikanta Das
  • As expected, RBI keeps repo rate unchanged at 4%, maintains the accomodative stance.
  • The next meeting of the MPC is scheduled during December 6 to 8, 2021.

Analysts views on Monetary Policy:

ASSOCHAM reaction on RBI Monetary Policy

ASSOCHAM today hailed the decision of the RBI's Monetary Policy Committee to stay on the course of accommodative policy interest rates, without yielding to demand in certain quarters for a policy reversal. Commenting on the stance, ASSOCHAM Secretary General, Deepak Sood said, RBI has wisely responded   to India-specific needs for continuation of supportive interest rates for an economy which, as rightly pointed out by Governor Shaktikanta Das, is near the shore and not quite on it. Reversal of the easy monetary stance by a few developed nations need not be the template for India, the RBI has rightly emphasised. On inflation, Sood said, ASSOCHAM has been voicing a stand similar to what is mentioned in the RBI policy statement with regard to the need for 'calibrated reversal' of indirect taxes on fuel. "We have been consistently pressing for including petroleum products into the GST network for lowering the cost push inflationary pressures''.

Low-interest rates amid festive season will push consumption in housing sector

“RBI continues to be supportive of driving growth in the economy through benign interest rates, keeping liquidity conditions comfortable for all stakeholders. Unchanged policy rates and an accommodative stance keep up the optimism of market participants. Lower inflation projections from 5.7% to 5.3% for FY22 would be a  positive factor, signaling to harden interest rates unlikely in the near term. GDP growth remained at 9.5%, with upward revisions in Q2/Q3 FY22 hint at gradual recovery, as the aggregate demand is yet to pick up meaningfully. The halting of GSAP operations is an early sign of normalization, but readiness towards OMOs will keep liquidity conditions sanguine. We believe the backdrop of low-interest rates amidst the festive season will push consumption in housing and its ancillary sectors. We remain positive on stocks such as HDFC Ltd, CanFin Homes, and large banks such as SBI, ICICI Bank. Naveen Kulkarni, Chief Investment Officer, Axis Securities

MPC keeping a close eye on a sustained pick-up in growth

The inflation trajectory moderated in Q2 and is projected to be around the 5% mark, within RBI’s tolerance levels. Overall, the MPC is keeping a close eye on a sustained pick-up in growth, given slowing growth patterns in some of the other economies. The policy had a “balanced and neutral” tone – with continued support for growth and a commitment to a gradual and calibrated change in policy based on emerging data and events Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank 

RBI eyeing rate increase in next meet?

The RBI was clear about the fact that it would be careful of not rocking the boat in any way. RBI Governor went to the extent of pointing out that we are close to the shore but there is a life beyond the shore too. In my opinion, the glide path has been initiated with the G-sec bond buying programme dialed back to NIL, and the Variable Reverse Rate Repo (VRRR) auction size enhanced to INR 6 trillion by early December. The RBI also has opened itself up to increasing the VRRR duration to 28 days if need be. The actions on liquidity is expected to bring up the overnight money market rates to above the current reverse repo rate of 3.35% and we think that  RBI will then be open to adjusting the Reverse repo rate to reduce the size of the corridor. Overall, we think that RBI has kept the room open for a reverse rate repo increase in the upcoming December policy. No changes are envisaged to the Repo rate in the current fiscal and can only be addressed in FY 2022-23 after a thorough understanding of the evolving growth-inflation mix. ~ Indranil Pan, Chief Economist - YES BANK on the RBI Monetary policy

RBI reassures markets that monetarily policy normalization will be gradual, calibrated

RBI policy is a " Mai Ho Naa" policy aimed to achieve multiple objectives. Keep Growth Supported, Inflationary expectations under check, Financial Markets stable, Liquidity adequate and appropriate, Yield Curve in shape and ensure smooth passage of Govts borrowing Program. They have reassured the markets that monetarily policy normalization will be gradual and calibrated. Nilesh Shah, Group President & MD, Kotak Mahindra Asset Management Company

Demand for homes likely to continue to gain momentum

The decision to maintain the repo rate and reverse repo rate by the RBI is in line with expectations. It has also affirmed to its accommodative stance, which will provide stability to the markets and give much-needed liquidity. This status quo will further allow demand creation including for high involvement products like real estate. RBI's resolve to keep easy system liquidity and low interest is key to the recovery of the real estate industry and the overall economy. The real estate sector is expected to continue benefiting from the pass-through of low benchmark lending rates to end consumers, especially in the residential segment. The optimism of RBI regarding economic growth is welcome; It will also help in sustaining economic stability as well as keep the real estate sector stay afloat during these unprecedented times. The demand for homes is likely to continue to gain momentum going forward. Ram Raheja, Director, S Raheja Realty Pvt Ltd

Equity markets relieved temporarily by the dovish tone

The MPC meet outcome on Oct 08 was largely on expected lines, though sounding a bit dovish. The RBI seems to be following the other central banks by first trying to reduce liquidity (by abandoning GSAPs and announcing VRRR calendar). It also cut inflation projection for FY22 by more than the street expectations to 5.3%.  Though it has not hinted at hike in rates, reverse repo rates could be hiked in December meet, signaling the start of policy normalization. The equity markets are relieved temporarily by the dovish tone but will be aware of the rate hike possibilities going ahead. Deepak Jasani, Head of Retail Research, HDFC Securities

Expect RBI to pursue faster normalisation through a back-loaded hiking cycle

Governor Das and the MPC’s statement maintained an accommodative bias, but we note signs that the RBI is preparing the ground for a very modest exit from its highly accommodative policy stance. In our view, the decision to shelve the bond purchase program and maintain only its “twist” operations as a yield-signalling tool suggest the RBI is setting the stage for a gradual exit from very accommodative liquidity conditions. We continue to expect the RBI to pursue faster normalisation through a back-loaded hiking cycle, once it is sure the economic recovery will be sustained. This should keep the RBI on track to raise the reverse repo rate from the December MPC, and we continue to look for repo rate hikes in Q2 22, most likely at the April MPC. Rahul Bajoria, Chief India Economist

Liquidity VRRR auction calendar till December is a welcome move

The liquidity VRRR auction calendar till December is a welcome move which definitely gives further clarity on the liquidity tapering front. If the Fed’s stance in Nov goes as expected, then December could be the time the RBI finally begins to reduce the gap between the repo and reverse repo rates. In sum and substance, this times policy didn’t throw any curveballs, hence was well received by the market. Jimeet Modi, Founder and CEO Samco Group

No policy reversal in the immediate future

The announcement by the Monetary Policy Committee brings in no surprises.  As expected by BWR, the MPC has kept the repo and reverse repo rates unchanged.  While continuing with the accommodative stance with 5-1 vote, it has signalled the end to continued monetary easing by announcing a calendar for Variable Rate Reverse Repo (VRRR) and a proposal for fortnightly 14-day VRRR auctions. It has continued with the earlier projections of GDP at 9.5% for FY22 but has reduced the inflation rate from the earlier estimate of 5.7% to 5.3%, mainly by reducing the projected inflation in the second and third quarters from 5.9% and 5.3% to 5.1% and 4.5%, respectively. With greater restraint on the inflation front, the MPC has decided to support growth by continuing with the status quo. With growth concerns continuing in contact intensive sectors and with the commercial credit by the banking system continuing to be tepid, we do not expect policy reversal in the immediate future. M Govinda Rao, Chief Economic Advisor, Brickwork Ratings

Click here for complete Monetary Policy Report: Monetary Policy Report October 2021Monetary Policy Statement, 2021-22 Resolution of the Monetary Policy Committee (MPC) October 6-8, 2021 ;& Governor’s Statement : October 08, 2021

Source: rbi.org.in ; Livemint, Business Standard, Money Control, Financial Express

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