In line with consensus and QuantEco Research expectations, the RBIs MPC at its final scheduled review for FY21 decided to leave all policy rates unchanged.
Download ReportRBI Policy - Balancing continuity, accommodation and normalization
The RBI maintained status quo on monetary policy as well its accommodative stance while announcing extension of special liquidity dispensations, incentives for targeted credit flow for MSMEs, and retail access to primary and secondary g-sec markets, besides other regulatory changes. With inflation projected to moderate and remain within the target band and GDP estimated to clock a double-digit growth in FY22, the central needs to conduct a balancing act between policy continuity, accommodation, as well as normalization. We expect the policy sequencing to play out via
1) Continuity in accommodative monetary policy stance at least until H1 FY22,
2) Provision for accommodation for g-secs via aggressive OMOs/OTs to curb the upside on term premium from elevated supply pressure in a continued fashion for the next 4-quarters, and
3) Monetary policy normalization from H2 FY22 onwards beginning with the restoration of the width of the LAF corridor to its pre COVID level of 25 bps from 65 bps currently, followed by a 25 bps hike in the repo rate in Feb-22. From a bond market perspective, the trading range for the 10Y g-sec yield has shifted upwards to 6.00-6.25% from 5.75-6.00% in recent months. While the combination of accommodative monetary policy stance, forward guidance, and liquidity surplus would keep yields anchored at the lower end, fiscal pressures would push it towards the upper end, which to some extent will get offset through RBI’s bond market interventions.