Views (6 Aug 2021) of Mr. Abheek Barua,
Chief Economist, HDFC Bank
The RBI has continued with its line of supporting growth despite the recent spikes in inflation. That said, recognizing the concerns around inflation (RBI revised up its inflation forecast to 5.7% from 5.1% for FY22) and the excess build-up in systemic liquidity over the last month (at INR 8.5 lakh crore as of 4 August), we saw the central bank take its second step towards liquidity normalization. The first being the tolerance towards some upward adjustment in the 10-year yield in July.
The RBI announced an increase in the quantum of variable reverse repos (VRR) by INR 2 lakh crore and also provided forward guidance on systemic liquidity to be close to INR 4 lakh crore by September-end. In response to tighter liquidity conditions, we expect short term rates to increase and return on instruments like CPs to rise. That said, this liquidity normalization should be viewed as a gentle calibrated move, partly in response to large excess liquidity surplus in the system, and not as an aggressive roll-back of monetary policy support.
With regards to the bond yield curve, while the 10-year yield is likely to inch up in response to the policy announcement today, the uneven structure of the curve could persist unless there are more evenly distributed interventions, across the curve, through G-SAP, OMOs, Operation Twists by the central bank.
View on Monetary Policy (6 August 2021)
by Suvodeep Rakshit,
Vice President & Senior Economist at Kotak Institutional Equities
“Overall, the policy is as expected on rates and stance. We had raised a possibility of split voting and divergence in members’ opinions, the details of which will be further clarified in the minutes. While we had expected the liquidity-related normalization measures from September/October, the RBI’s frontloading of VRRR comes with a staggered approach. Given the reasonable demand for the existing 14-day VRRR, the graded additional quantum is not expected to move the overnight rates, just yet. We, however, see this as the first signal towards calibrating liquidity. Tools like overnight VRR, further increase in quantum of VRRR, and allowing non-bank participation in the VRRR could be the measures before the onset of policy normalization.
Overall, we view this policy as RBI’s signal that it remains watchful on growth while the concerns on inflation have increased. It is unlikely that the RBI will change its stance in the October policy, although the split voting pattern could further increase. We expect the start of policy normalization in the form of hike in reverse repo rate could be around the December policy after risks of further Covid wave fade amidst the higher pace of vaccination and visibility of durable growth.”
The Post-MPC comments/quote by Mr. Dhiraj Relli, MD & CEO, HDFC Securities.
“As expected MPC voted unanimously to leave the policy repo rate unchanged at 4%; but what was unexpected was the divided view (5 to 1 majority) in keeping the stance accommodative. The RBI has noted that India’s economic activity picked up pace in June-July as some states eased pandemic containment measures. On the inflation front, the RBI has nudged the Govt to take more concerted steps to ease supply constraints to restore the supply-demand imbalance. The RBI is hopeful of pick up in credit demand but worried about the state of MSMEs. Going by the overall outcome of the MPC meet, one wonders whether we have begun the normalisation process in a small way.”
View on RBI Monetary Policy (Aug 2021)
by Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund
“The RBI MPC left key rates unchanged – on expected lines. The accommodation bias was maintained too, however with 5-1 (1 member dissenting). The Variable rev repos (VRRR) amt was also graded increased from INR 2 tn to INR 4tn over next 1 month. This policy has embarked on liquidity normalisation as a start point, being mindful of growth drivers as well. We could see the yield curve gradually flatten with shorter end moving up tad faster than longer end. Markets could start pricing in possibilities of rev repo rate hike, though the policy refrained from any such guidance.”
View on Monetary Policy
by Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank:-
“Expectedly the RBI maintained status quo, attempting to maintain a fine balance between the risks to GDP and inflation. However, we believe that the increased risks to inflation especially as the economic activity is picking up pace has prompted the MPC into taking liquidity normalization measures ahead of our expectations. We expect additional liquidity normalization measures like overnight VRRR, increased quantum of higher tenure VRRR in the months ahead before expecting a reverse repo rate hike in December.”
View on RBI Monetary Policy (Aug 2021)
by Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company Limited
“While the MPC has decided to maintain status quo on key policy rates and voted 5-1 in favour of continuing with accommodative stance in this meeting, it has also taken few expected steps towards normalisation of excess system liquidity. A phased increase in the quantum of Variable Rate Reverse Repo operations to INR 4 trillion is one such measure that in our view marks the beginning of a cautious withdrawal of exceptional, post-Covid accommodation. However, with continuing emphasis on orderly evolution of yield curve and ongoing support via GSAP, OMOs and OT, markets are expected to take these measures in to its stride. Going forward, we continue to expect further baby steps towards rate and liquidity normalisation as economy continues to improve.”
Ms. Madhavi Arora, Lead Economist,
Emkay Global Financial Services on RBI MPC announcement ( 6 Aug 2021)
“The MPC expectedly kept the key rates unchanged unanimously and reiterated its accommodative stance both on rates and liquidity. However one dissent on continuation of accommodative stance for foreseeable future shows the emerging split getting generated within the MPC. The MPC maintained that growth is still sub-par and needs consistent firm traction, and that continued policy support is vital for a durable growth revival. However despite emerging inflation risks and sharp upward revision in FY22 inflation, MPC retained the view that inflation has transitory aspects, led by supply-side bottlenecks, even when they see inflation hugging the higher end of their tolerance band in the near term. However, the focus was on Communication on liquidity management key amid evolving market risks and the yield curve management. The RBI reaffirmed longer tenor VRRRs as the first step toward normalization amid current bumper liquidity surplus and reinstated that the normalization of liquidity operations should not be confused with liquidity tightening.
The reintroduction of fortnightly VRRRs with higher quantum restates the same. We note the surplus liquidity has not necessarily percolated well across the curve or segments of the rates market as asymmetric gains in credit markets. This also raises the risk of rerouting of surplus liquidity and excessive risk taking in other asset classes. We do not see the VRRR quantum increase as a step towards Reverse Repo tightening in the near-term and still see that not happening in CY21. On YCC, the RBI reiterating its support for the bond market and also indicating that they do not necessarily target any level or segment of the yield curve and would like to see active trading in all segments of the yield curve for its orderly evolution. Their statement on keeping a balance in on-the-run and off-the-run securities while conducting GSAPs is welcome as with markets were showing their discomfort with RBI’s choice of papers for GSAP and devolution of papers at cut-off yields uncomfortable to the RBI. However, the RBI still hinted at their preference for lower sovereign risk premia ahead. We reckon that even with yields inching up orderly and gradually, the RBI will continue to strive to fix the artificially skewed yield curve and maintain its preference for curve flattening. We expect the RBI to get more accountable and action oriented as we move into 2HFY22. We maintain RBI may have to stretch GSAP/OMOs beyond Rs4.5-5tn+ to manage impending demand-supply mismatch.”
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