The RBI’s monetary policy statement issued on Friday was pretty much in line with the market expectations. As predicted, the RBI’s Monetary Policy Committee (MPC) kept policy rates unchanged at 4 percent, thus continuing with its accommodative policy stance.
But it is to be noted that RBI has reduced its growth projections for the financial year 2021-22 from 10.5% to 9.5% at the backdrop of the pandemic. Currently it reduced its forecast of real GDP growth for FY2021-22 by 1 percent to 9.5 percent. RBI did a downward revision in Q1 and Q2 numbers, and upward revision in Q3 and Q4 numbers.
The second COVID wave has immensely hit the urban sector with urban demand contracting the most. This has led to urban employment plummeting in the recent months, so much so that urban unemployment, in May stood at 18%. On the other hand, there are some downside risks to the strong rural demand as well. This is due to the high spread of the virus into the rural parts of the country. However, the RBI has maintained that with the vaccination drive acceleration in the country in the coming months, economic activity should normalize quickly. Due the aforementioned reasons, RBI maintains that the impact of the second wave would be less than the first wave. Further, the rebound in global trade and conducive external conditions should support exports.
Inflation
On inflation front, RBI has projected FY2021-22 CPI inflation at 5.1 percent. It has revised quarterly numbers marginally upwards (Q2-Q4) by 20-30 bps. According to the RBI, risks are evenly balanced on the inflation front. External conditions like rising crude and commodity prices along with the current domestic pandemic-led supply constraints are likely to create upside pressure on inflation. While on the other hand, the softening domestic demand and relaxation in the state lockdown conditions in the coming weeks will ease the pressure on inflation.
According to the RBI Governor, Monetary Policy Committee’s (MPC) commitment towards ensuring conducive financial conditions and adequate system liquidity was a priority. Thus, it announced the extension of the G-SAP programme (G-SAP 1.0) to the second quarter, in the form of G-SAP 2.0. Further, according to reports it has set aside Rs 10,000 crore for SDLs (state development loans).
Contact-intensive sector provided relief
Among the development and regulatory measures announced, the contact-intensive sector too has been provided some relief. The on-tap liquidity window for contact-intensive sectors, the additional special liquidity facility provided to SIDBI, to support the MSMEs’ credit requirements, as well as enhancement of the exposure thresholds for resolution of stress among MSMEs, non-MSEME small businesses and business loans to individuals are aimed at maintaining stability in liquidity and credit conditions.
Thus, immense liquidity proposed in the MPC meeting, shows that the MPC’s continued accommodative policy stance reflects its strong determination to prioritize growth over inflation expectations.
It is also to be noted that a significant message is being sent to the market that RBI intends to keep yields stable. This is being done through G-SAP as well as regular intervention in the form of OMOs and Operation Twist, in order to see the government borrowing programme through, in a non-disruptive manner.
According to official data released Forex reserves have grown immensely to a healthy $600 billion level. On the other hand, the RBI is also endeavoring to keep the rupee stable and range-bound through active intervention.
In order to normalize the excess system liquidity gradually, RBI has been actively conducting Variable Rate Reverse Repo (VRRR).
Thus, it can be rightfully stated that overall, the policy appears to be neutral from the debt market’s perspective