RBI did prioritise growth in money policy, but it’s not enough: Analysts

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The Reserve Bank of India (RBI) kept key interest rates steady as widely expected on Friday amid persistently high inflation, and after a better-than-expected reading on economic growth.

The monetary policy committee also decided to retain an accommodative policy stance at least for the current financial year and into the next year to revive growth on a durable basis, Governor Shaktikanta Das said in an online briefing.

Here is how Dalal Street analysts reacted to the money policy:-

Ashish Shanker, Motilal Oswal Private Wealth
The RBI policy was on expected lines. They have prioritised growth over inflation. This is an acknowledgment that inflation drivers seem to be more supply side led. An accommodative liquidity stance will ensure access to liquidity will not be a challenge and the ongoing recovery continues to gather steam. This will help push through govt borrowings in a year where the revenues are under pressure. Guidance is better than earlier on growth and flows. Positive for markets.

VK Vijayakumar, Geojit Financial Services
Status quo in policy rates and policy stance are on expected lines. The central bank has reiterated that it will use appropriate policy instruments to ensure ample liquidity to support growth. The revision of FY 21 GDP growth rate to -7.5 percent is positive. RBI’s projection of GDP growth to be positive for H2 is in line with market’s optimism. Emphasising the multi-speed upturn in economy, the central bank has announced the extension of on tap TLTRO to stressed sectors. There is no market moving announcement in the policy, but the overall tone is positive.

Aurodeep Nandi, Nomura
RBI resisted blinking despite the high inflation glare. There were two insecurities that the market had in the run-up the policy meeting – one, whether the higher-than-expected inflation and growth data would trigger a rethink on the existing ‘lower-for-longer’ guidance on policy rates; and two, whether the RBI would look to temper the surge in liquidity to re-align money market rates with the policy corridor. On both, the RBI has essentially doubled down on its October accommodative guidance and asserted that inflation remains largely supply side driven and that supporting growth remains its paramount priority. Our baseline projection is that the RBI will continue keeping policy rates on hold in the near future.

Joseph Thomas, Emkay Wealth Management
The RBI policy announcement reflects the determination of the central bank to continue with the accommodative policy, with the base rate unchanged at 4%, while being cautious about the inflationary pressures that are building up. But growth gets the priority once again, with inflation projected to be lower in Q4 and H1 FY22. That all the liquidity measures initiated earlier will continue to be in force, is a consolation, especially in a high inflation scenario. The growth projections too mirror the gradually improving ground conditions, with the overall growth for this year put at -7.50 %, with mildly positive growth for Q3 and Q4. The features and contents of the policy gives the reassurance that lower rates and the plenty in liquidity will continue for a longer time period, till the time inflation rises so much as to derail it. The policy is supportive of both equity and fixed income markets, with its moderating implications for rates.

Ramesh Nair, CEO & Country Head, JLL
Higher than expected recovery in Q2 FY 21 GDP reflects the resilience and robustness of the Indian economy. RBI’s decision to hold the policy rate and accommodative stance to revive growth on a sustainable basis augurs well for the economy. This is in spite of the fact that inflation for April to Oct 2020 is hovering above the higher limits of RBI’s inflation target. The decision to maintain the policy rate was in line with the real estate sector’s expectations as the sector is just recovering and is yet to bounce back to Pre-COVID-19 levels. Residential real estate witnessed initial signs of recovery with sales increasing by 34% in Q3 2020 over Q2 2020. The RBI’s decision to hold the rate will help homebuyers to avail the benefit of the prevailing lowest mortgage rates. Green shoots of recovery armed with other incentives such as stamp duty reduction in some states and the flexibility of developers in offering best prices/payment schemes will help in further improving home sales.”

Sudhakar Shanbhag, Kotak Mahindra Life Insurance
RBI’s MPC has unanimously agreed to hold rates and the accommodative stance to support growth post Covid period while being mindful of the inflation numbers. Since liquidity measures are expected to continue which was one of the worries of the market before policy, yields are expected to remain benign with the steepness of the curve to continue.

Jimeet Modi, Founder & CEO Samco Group
Although increasing inflationary tendencies have been acknowledged, little seems to have been done to contain the price index. In fact, it is assumed that CPI will cool down to below 5% in H1 of FY21-22. In all likelihood, inflation isn’t going lower given the massive helicopter money across the world created by central banks and run up in commodity prices such as crude, base metals. It is likely to remain elevated given that import restrictions are in place to support the domestic economy. Such a growth recipe will have unintended consequences of higher inflation not only in India but across the world which will be the bigger animal to tame a few quarters down the line. However, in the near term this will support recovery in financial markets and will keep the bulls charged in the capital markets.

Divakar Vijayasarathy, Founder & Managing Partner, DVS Advisors LLP
The critical thing to notice is that RBI has indicated that dividends would not be distributed by commercial banks, which would act as a substitute for recapitalisation and provide additional security to depositors. The communication from RBI that it would take necessary steps to easy liquidity as and when required is reassuring.

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