Expert views: RBI holds rates at record lows amid concerns over rising COVID-19 cases

·7-min read
FILE PHOTO: A worker walks past the logo of Reserve Bank of India inside its office in New Delhi

(Reuters) - The Reserve Bank of India (RBI) kept interest rates steady at record lows on Wednesday, as widely expected, sticking to its accommodative monetary policy amid concerns that rising COVID-19 infections could derail the country's nascent economic recovery.

The RBI kept the repo rate or its key lending rate steady at 4%, while the reverse repo rate or its borrowing rate was left unchanged at 3.35%.

India's central bank has slashed the repo rate by a total of 115 basis points (bps) since March 2020 to soften the blow from the pandemic. This follows 135 bps worth of rate cuts since the beginning of 2019.

"The MPC judged that monetary policy should remain accommodative till prospects of sustained recovery are well secured," Governor Shaktikanta Das said.

COMMENTARY

SIDDHARTHA SANYAL, CHIEF ECONOMIST, BANDHAN BANK, KOLKATA

"Despite the upward revision in their inflation forecasts, which we feel is largely due to supply-side issues, the statement clearly suggests that the accommodative monetary policy stance will be maintained in the foreseeable future. Inherently, the MPC continues to prioritise growth over other possible goals of monetary policy."

"The sharp knee-jerk positive reaction by the bond market after today's monetary policy and related announcements is clearly justified. Against the backdrop of a large government borrowing and renewed uncertainties with fresh surge in COVID-19 infections, a key challenge for the RBI is to maintain orderly conditions in financial markets."

"Following an intelligently designed borrowing programme announced last week, today's announcement of the GSAP is particularly important. The GSAP will almost serve the purpose of an OMO calendar, which had been on the bond market's wish-list for a long time... They clearly recognise the need for anchoring interest rates during the current nascent stage of growth recovery and remain forthcoming in conveying that to the markets."

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

"The MPC's decision came in line with expectations given the uncertain demand and inflation outlook due to a resurgence in COVID-19 cases. Policy rates, GDP and CPI forecasts were left broadly unchanged as expected. And, the guidance reiterated continuation of accommodative stance as long as it is needed (open-ended commitment)."

"More importantly, the central bank made an outright commitment to conduct one trillion rupees ($13.54 billion) in OMOs to ease liquidity pressures in the G-sec market. In addition, 500 billion rupees refinancing facility was announced for NABARD, NHB and SIDBI as a precautionary measure against credit concern-led liquidity tightness. The RBI remains committed to keep financial conditions accommodative given the headwinds to growth from the second COVID-19 wave."

SHUBHADA RAO, FOUNDER, QUANTECO RESEARCH, MUMBAI

"The RBI, as expected, has kept the rates unchanged and maintained an accommodative stance until a sustained recovery takes root. Amidst a resurgence in COVID-19 cases, the central bank was expected to remain largely dovish. A key measure taken today was the announcement of G-sec Acquisition Program (GSAP) under which the RBI has announced a purchase of government bonds of one trillion rupees in Q1 of FY22. This will markedly assuage bond market concerns of pressure on yields on account of a large government borrowing program. The steps taken today (including the ones on variable reverse repo auctions) are aimed to flatten the yield curve."

SAKSHI GUPTA, SENIOR ECONOMIST, HDFC BANK, GURUGRAM

"The RBI kept its policy stance and rate unchanged as expected. The policy was more dovish than expected."

"While sounding rising infection risks, the central bank continued to keep its growth forecast unchanged at 10.5%. On inflation, as expected, the central bank revised up its forecast. But we see further upside risks to this inflation path over the coming months."

"The focus of the policy was clearly on yield management. The announcement on increasing the tenure of variable rate reverse repo auction operations are likely to put some pressure on short-term rates. On the other hand, the commitment towards open market operation purchases is likely to support the long end of the curve."

SUMAN CHOWDHURY, CHIEF ANALYTICAL OFFICER, ACUITÉ RATINGS & RESEARCH, MUMBAI

"The central bank has taken note of the underlying inflationary pressures emanating from increased global commodity prices and higher logistics costs but at the same time projected relatively benign inflationary numbers for the next few quarters. This reinforces our opinion that preservation of the incipient growth trajectory is the primary focus of monetary policy over the next few quarters."

"The other key element in the RBI's policy statement is the introduction of a planned secondary market G-sec acquisition programme (GSAP 1.0), which will go some way in cooling the increased bond yields. A massive one trillion rupees is proposed to be acquired in Q1FY22 itself, which is expected to facilitate the absorption of higher government borrowings at relatively lower costs. Along with OMO (open market operation), GSAP 1.0 is likely to be a potent tool to stabilise bond yields in a volatile market scenario."

MADHAVI ARORA, LEAD ECONOMIST, EMKAY GLOBAL FINANCIAL SERVICES, MUMBAI

"The MPC expectedly kept the key rates unchanged unanimously and reiterated its accommodative stance both on rates and liquidity. The guidance has become more open-ended and state-based amid new uncertainties and evolving nature of the economy, stating that the policy stance will remain accommodative till growth recovers sustainably."

"The bigger move was with regards to yield management as the RBI tries to break the negative loop of liquidity (mis)communication and sovereign premia. The RBI stressed on smooth liquidity management and orderly G-sec borrowings, with a more vocal and defined secondary market GSAP. This could lead to much lower sovereign risk premia ahead amid elevated borrowing calendar this year. We reckon the RBI will continue to strive fixing artificially skewed yield curve and maintain its preference for curve flattening."

GARIMA KAPOOR, ECONOMIST - INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI

"The monetary policy has succeeded on calming the nervousness in the bond markets by committing an assured purchase of G-secs while maintaining the accommodative guidance. While the inflation estimate has been increased marginally, the overall dovish tone of the policy clearly prioritises growth amid the backdrop of second wave of COVID-19 in India."

SHASHANK MENDIRATTA, ECONOMIST, IBM, NEW DELHI

"The central bank has moved away from a time-based guidance to a state-based guidance, which is an appropriate stance in the current uncertain environment. This suggests that the RBI is likely to be growth-supportive until the economy normalises. The bias is towards more accommodation and the announcement of the guidance on quantum of G-sec purchases reflects the same."

"The central bank also retained its GDP forecast for FY22 at 10.5% even as it trimmed the Q1 forecast. The inflation forecasts have been raised slightly, amid upside risks on account of rising commodity prices and logistics costs."

"Overall, the RBI is likely stay in an accommodative stance to nurture the recovery."

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

"As expected by us and the market, the RBI kept the policy rate (the repo rate) unchanged at 4% while keeping the stance as accommodative. This too is in line with our expectation despite the surging inflation since the massive second wave of infection has induced ample uncertainty about the recovery momentum."

"While nobody is expecting a reversal of the momentum, there is already tell-tale evidence of stalling momentum. As we have been reiterating, various high-frequency data for February does suggest loss of momentum and this has seemingly extending to March."

"More importantly, with domestic consumption being much more muted compared with the levels of activity, worries do persist even though RBI retained its FY21-22 real GDP growth expectation at 10.5%. This, we believe, will eventually be revised down by 2H21."

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI

"Today's policy is in line with the expectations. The RBI's assurance on the secondary market gilt purchase programme in FY22 will help in the management of the yield curve. However, the MPC's projections of the GDP and CPI trajectories do not reflect the uncertainties created by the second wave of COVID-19 infections and the use of blunt measures like lockdowns in many states."

(Reporting by Nallur Sethuraman, Chandini Monnappa, Anuron Kumar Mitra, Rama Venkat, Soumyajit Saha and Shivani Singh in Bengaluru; editing by Uttaresh.V)