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RBI’s Das marks to market GDP forecast and keeps the pedal on liquidity

Governor Shaktikanta Das announced RBI's decision to maintain status quo on rates at its 4 June policy review. (PTI Photo)Premium
Governor Shaktikanta Das announced RBI's decision to maintain status quo on rates at its 4 June policy review. (PTI Photo)

  • To be sure, bond investors don’t have much to complain, since Das seems to be comfortable on the inflation front. RBI raised its inflation forecast for FY22 marginally to 5.1%. That is closer to the upper limit of 6% for the inflation targeting central bank and it seems to be fine with this rise

MUMBAI: In all respects, Friday’s monetary policy from the Reserve Bank of India (RBI) ticked all the boxes for the markets. The commitment to growth was reiterated, rates were left unchanged and the central focus remained on liquidity. In short, if governor Shaktikanta Das wanted the markets to keep calm and carry on, he certainly did his part.

Das believes the central bank now needs to focus on distribution of liquidity instead of just adding liquidity to the markets. He would be right, as despite an increase in the scope of the repo window and new targeted liquidity windows, which was further increased by one today, not every borrower has been able to access funds with the same ease. So now, yet another liquidity window is born from which banks can borrow and lend to travel agents, beauty parlours, aviation and other contact intensive services. What’s more is that the RBI has sweetened the deal some more. It will pay banks 40 basis points more than the reverse repo rate of 3.35% on surplus funds up to the size of the loan book created from the above window that they park with the RBI.

For the bond market, Das has announced a slightly increased season 2 of the government securities acquisition programme (G-SAP) for the second quarter. The RBI will buy Rs1.2 trillion worth of government bonds over and above the Rs1 trillion it will end up buying in the June quarter.

Madhavi Arora, chief economist at Emkay Global Financial Services Ltd, believes that the central bank will have to buy close to Rs4.5-5 trillion of bonds to keep yields from rising. The 10-year bond yield hardly moved today, having priced in a higher G-SAP buying spree. Das reminded the bond market to keep yields from rising again.

“Devolvement and GSAP have conveyed the RBI’s views to the market," Das said in his statement. The upshot is that bond yields may well be kept leashed even though inflationary fears have begun to dominate bonds world over.

To be sure, bond investors don’t have much to complain, since Das seems to be comfortable on the inflation front. The central bank raised its inflation forecast for FY22 marginally to 5.1%. That is closer to the upper limit of 6% for the inflation targeting central bank and it seems to be fine with this rise. The RBI also shaved off one percentage point from its economic growth forecast for FY22, aligning itself to other forecasters who brought down their expectations last week. Gross domestic product (GDP) is now expected to grow by 9.5% in FY22, according to the RBI.

The message is clear. Das won’t stop from taking measures to safeguard the struggling growth recovery and worrying over inflation is premature in the middle of the second wave.

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