RBI Monetary Policy: Repo rate steady; 10-yr yield may remain in 6-6.20% range in Apr-Jun quarter of FY22


Given the uncertainties, the MPC has dropped the time based guidance and instead focused on growth revival on a sustainable basis

By Upasna Bhardwaj

While the MPC’s decision to keep rates and policy/ liquidity stance unchanged doesn’t come as a surprise, the statement does aim at addressing the key concerns and questions which had been weighing on the market sentiments. The MPC has clearly prioritised growth even as the risks to inflation have been adequately addressed. The assurance of policy support for growth was much needed in the current environment when uncertainties are increasing amidst the proliferation of covid infections and the consequent lockdown restrictions in key states’ which contribute nearly 30% to overall GDP. Any failure to break the infection chain poses a significant risk to broad-based growth and macro stability.

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Going ahead we, for now, retain our GDP growth estimate for FY22 at 10.5%, with risks equally balanced depending on the pace of the vaccination drive.

Given the uncertainties, the MPC has dropped the time-based guidance and instead focused on growth revival on a sustainable basis keeping in mind the objective of inflation signalling that any actions going ahead will be contingent on data.

The recent uncertainty and the consequent risks to growth from the re-introduction of restrictions in certain regions is expected to keep policy normalization (which was earlier expected to begin around August by bringing the overnight rates within the corridor followed by a hike in reverse repo rate) at bay for now.

The decision to conduct VRRR auctions (Variable rate reverse repo) of longer maturity should put pressure on the shorter end of the curve but is not expected to shift the overnight rates beyond the reverse repo rate of 3.35% probably through CY2021. On the far end of the curve, the surprise decision by the RBI to announce an OMO calendar of Rs 1 lakh crore in 1QFY22 under the G-sec acquisition programme is a big positive for Gsecs given that 1Q net supply (net of RBI) will now be ~Rs 1.4 lakh crore as against GoI’s announced calendar amount of Rs 2.4 lakh crore. 10-yr yield may now be in the 6-6.20% range (below 6% may not sustain given the adverse global conditions) in 1QFY22.

While the near term policy support has been provided for, the inflation risks too remain quite real which may restrict sustainability of aggressive policy support beyond the near term. Further, the rising global yields may provide a floor to the domestic yields.

(Upasna Bhardwaj is Senior Economist at Kotak Mahindra Bank. Views expressed are the author’s own.)

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