Avnish Jain
Head – Fixed Income, Canara Robeco Asset Management Company
The policy was on expected lines with the Monetary Policy Committee (MPC) holding fire, and maintaining status quo on rates with a unanimous decision.
The stance was also maintained at “accommodative”, albeit with one member expressing reservations on continuing with stance in wake of persistently high inflation. RBI Governor highlighted reasons like supply disruptions, elevated logistic costs, high global commodity prices and high local fuel taxes for current inflation trend. He pointed to moderation on core inflation in recent months as sign of comfort. Nevertheless, the RBI raised the CPI inflation target for FY22 to 5.7% from 5.1%, reflecting higher input prices. CPI inflation for next year is projected lower at 5.1% for FY2023. Growth projections were maintained at 9.5% for FY2022. On liquidity front, RBI is increasing the variable reverse rate repo (VRRR) auctions from current Rs2 Lac crore to Rs. 4 Lac by end of September, increasing the amount by Rs.50000cr every fortnight. This is to take care of excess durable liquidity in the system which is currently close to Rs.10Lac crore.
The MPC seems to be taking a leaf out of global Central bank’s playbook wherein the major central banks are comfortable running over inflation targets temporarily, citing the current inflation trajectories, in their own respective countries, as transitory. Despite high inflation prints in countries like US, UK and EU, central banks have stuck to their guns and continue with near zero rates and bond buying programmes. The RBI believes similarly that current inflation trend in transitory and should trend lower in rest of FY2022.
Market reacted negatively on account of (1) Increase in CPI inflation projections (2) Increase in VRRR amount which may be a first step towards policy normalisation (3) and lastly, dissent by Prof. Varma on continuation of accommodative stance.
However, announcement of GSAP of Rs.25000each for next week and end of August should keep markets steady. Further , CPI inflation is likely to drop below 6% in July 2021 and may continue to drop in coming months. This may give some comfort to markets. Global crude prices have further retraced from highs, which may give short term relief on local prices. 10Y yield has risen to 6.25%, which may not be comfortable for RBI. RBI may further intervene via operation twist, auction cancellations etc. to ensure any sharp rise in yields. 10Y yield may be expected to trade in range of 6.15-6.35% in near term. (Share Manthan, August 06, 2021)
