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Expect short term yields to inch up over the next 1-2 quarters - MPC 8th October - Acuité Ratings

Posted On: 2021-10-10 15:44:04 (Time Zone: IST)


Mr. Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research comments on the MPC announcement on 8th October 2021

"On expected lines, MPC has continued to reaffirm its commitment to an accommodative policy till we witness the emergence of a broad based and durable domestic economic recovery. While there has been no changes in any of the benchmark rates whatsoever, the central bank has indicated its willingness to make a 'gradual' adjustment to the excess liquidity in the monetary system which currently stands at over Rs 9 Lakh Cr. The existing 14 day VRRR auction will be stepped up with the auction amount set to increase by Rs 1-2 Lakh Cr over the next 2 months, reaching up to Rs 6 Lakh Cr by Dec'21. Further, RBI may also consider introduction of a 28 day VRRR, if necessary to further calibrate the liquidity levels. Importantly, the G-SAP programme to purchase govt securities from the market has been ceased for now to ensure that there is no further infusion of liquidity. The plan is to reduce the surplus system liquidity from the current high levels to around Rs 2-3 Lakh Cr by the end of the current quarter. Although RBI has clarified that these measures can't be construed as liquidity tightening measures, we believe these are early steps towards the normalisation of the highly accommodative policy. We expect short term yields to inch up over the next 1-2 quarters based on such a guidance.

What is also important is that the RBI has reduced its forecasts for the headline inflation to 5.3% from 5.7% in FY22 based on the current moderation in the liquidity trajectory. While food inflation is expected to remain low, we believe there is a case to monitor inflation very closely over the next few months given the continuing commodity price pressures, industrial raw material shortages and the impending recovery in consumer demand."


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