WRAP: RBI looks to satisfy all with balancing act

Informist, Wednesday, Apr 7, 2021


By Siddharth Upasani


NEW DELHI – Government bonds fell sharply after the Monetary Policy Committee's decision to not provide a specific timeline for the continuation of its accommodative stance. However, a quick rebound followed after Governor Shaktikanta Das said the Reserve Bank of India was launching a secondary market bond purchase programme.


At the end of the day, all was well in the markets, with the rather tame guidance almost forgotten amid the RBI's unprecedented decision to commit its balance sheet for the conduct of monetary policy.


The latest addition to the RBI's toolkit promises to buy gilts from the secondary market to the tune of 1 trln rupees in the current quarter ending June. And going by Das' comments, the central bank will likely add to these purchases in subsequent quarters.


The intricacies of the new gilt acquisition programme, or 'GSAP 1.0', are still not clear given that the RBI has previously said the size of its open market purchases in 2021-22 (Apr-Mar) would be a minimum of 3 trln rupees. Is the 'GSAP 1.0' going to replace these purchases?
While lacking in clarity, 'GSAP 1.0' certainly evoked enough gasps from the market to drown out the dismay due to the missing guidance.
The RBI had announced in October that it would continue with an accommodative stance till Mar 31 and into the current financial year that began on Apr 1. While this meant the future of the stance beyond the April meeting of the Monetary Policy Committee was up in the air, the second wave of the coronavirus had sparked hope of an extension to the time-based guidance.
Its absence, then, was a disappointment. However, conditions on the ground are such that not much may have changed.


"Of course, the guidance has changed. There were expectations that the guidance would get extended by six months. But now it's a state-based guidance," said Shailendra Jhingan, managing director and chief executive officer of ICICI Securities Primary Dealership.


"(But) given that COVID cases are rising, growth coming back on a firm footing would be around six months away. So, I would still think that nothing changes. The policy is going to remain accommodative with no rate hikes at least in the first half of the year. From that perspective, the market should remain supported and yields should remain in a range," Jhingan added.


Additional words and interpretation by Governor Das of the template guidance provided by the committee in its statement also helped. In his address, Das said the stance of monetary policy would remain accommodative till the prospects of sustained recovery were well secured.


A tighter balancing act was performed on the liquidity front. Having announced in January that it would resume normal liquidity management operations in a phased manner, the RBI has had to since progress gingerly as conditions took a turn for the worse.


Today, even as Das said the RBI would conduct variable rate reverse repos of longer maturity, he was at pains to stress that these should not be viewed as liquidity tightening. To some economists, there are indications of backloaded normalisation in 2021-22.


"A failure to normalise liquidity now will imply harder adjustments required in future that can be disruptive," QuantEco Research said in a note.


QuantEco Research expects the width of the Liquidity Adjustment Facility corridor to be restored to 25 basis points from the current 65 bps via a hike in the reverse repo rate in Oct-Dec.


The normalisation of the liquidity glut will also need to take cues from incoming growth and inflation data.


The RBI did not feel the need to lower its GDP growth forecast of 10.5% for the current year. Already at the lower end, the RBI's growth forecast perhaps may have even been upgraded if not for the second wave of the coronavirus. An upgrade in the next couple of policy meetings is still possible, although much depends on the vaccination drive and the active case load.


An uptick in the forecast for inflation has also seemingly confirmed the widely held view that the rate-easing cycle is over and the only way ahead for the repo rate is up.


CPI inflation is seen averaging 5.1% in Jan-Mar 2022 and may move in the range of 4.5-4.8% in 2022-23.


Again, the RBI acted to even the scales. When asked at the post-policy media briefing if the repo rate, at 4.00%, had hit its floor, Deputy Governor Michael Patra looked to dispel such notions, saying the RBI remained flexible on all fronts.


"Overall, the dovish to balanced tone of the policy statement supports our call that policy normalisation in India is unlikely to start before Oct-Dec, assuming no major growth shocks," Standard Chartered Bank said in a note.


Given the uncertain circumstances, monetary policy could not afford to give a lot away and the RBI today was as dovish as it could possibly be.  End


Edited by Avishek Dutta


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