While the MPC’s selection to hold prices and policy/ liquidity stance unchanged does not come as a surprise, the statement does aim at addressing the essential issues and queries which had been weighing on the marketplace sentiments. The MPC has clearly prioritised development even as the dangers to inflation have been adequately addressed. The assurance of policy assistance for development was a lot necessary in the present atmosphere when uncertainties are rising amidst the proliferation of covid infections and the consequent lockdown restrictions in essential states’ which contribute practically 30% to general GDP. Any failure to break the infection chain poses a substantial danger to broad-based development and macro stability.
Going ahead we, for now, retain our GDP development estimate for FY22 at 10.5%, with dangers equally balanced based on the pace of the vaccination drive.
Given the uncertainties, the MPC has dropped the time-based guidance and alternatively focused on development revival on a sustainable basis maintaining in thoughts the objective of inflation signalling that any actions going ahead will be contingent on information.
The current uncertainty and the consequent dangers to development from the re-introduction of restrictions in particular regions is anticipated to hold policy normalization (which was earlier anticipated to start about August by bringing the overnight prices inside the corridor followed by a hike in reverse repo price) at bay for now.
The selection to conduct VRRR auctions (Variable price reverse repo) of longer maturity should really place stress on the shorter finish of the curve but is not anticipated to shift the overnight prices beyond the reverse repo price of 3.35% likely via CY2021. On the far finish of the curve, the surprise selection by the RBI to announce an OMO calendar of Rs 1 lakh crore in 1QFY22 beneath the G-sec acquisition programme is a large positive for Gsecs offered that 1Q net provide (net of RBI) will now be ~Rs 1.4 lakh crore as against GoI’s announced calendar quantity of Rs 2.4 lakh crore. 10-yr yield may well now be in the 6-6.20% variety (beneath 6% may well not sustain offered the adverse international circumstances) in 1QFY22.
While the close to term policy assistance has been supplied for, the inflation dangers also stay very genuine which may well restrict sustainability of aggressive policy assistance beyond the close to term. Further, the increasing international yields may well provide a floor to the domestic yields.
(Upasna Bhardwaj is Senior Economist at Kotak Mahindra Bank. Views expressed are the author’s personal.)