MPC Announcement - No clarity on the timeframe for the policy corridor normalization - Acuité Ratings & Research

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research comments on the MPC Announcement- Aug'21

"As widely expected, MPC has continued with its accommodative stance without any alteration in the benchmark rates given the continuing uncertainty on the domestic growth trajectory and the persistent risks of a fresh wave of the Covid pandemic. While RBI maintained its GDP growth forecast at 9.5% for FY22, it is interesting to observe that the growth projections for the next few quarters in the current fiscal have been scaled down while enhancing the growth estimates for Q1FY22. This reflects the central bank's concerns on the pace of consumption demand revival despite the expectations of a favorable Kharif crop, buoyant exports, steady progress in vaccination, and a conducive monetary and fiscal policy.

Importantly, MPC has also revised the inflation forecasts for FY22 to 5.7% from the earlier 5.1% given the inflationary overhang seen in the first quarter of the year. Nevertheless, it continues to believe that the inflationary pressures are transitory in the backdrop of supply-side constraints and a spurt in commodity prices. It is amply evident that RBI is comfortable with the headline inflation hovering around 6.0% i.e. the upper band in MPC's inflation targetting framework in the current environment which it continues to label as 'extraordinary'. Given the 'relatively weak' growth impulses and still 'nascent' investment demand, RBI would continue to be strongly supportive of growth over the next few quarters even at the cost of slightly higher inflation and the current policy statement is another reaffirmation of that stance.

While RBI would continue to maintain adequate systemic liquidity and implement the previously announced programmes like the GSAP, it has also announced its intent to manage short-term liquidity more actively through a significantly higher quantum of Variable Rate Reverse Repo Auctions (VRRR). However, there are no clear indications regarding the timeframe for the normalization of the policy corridor.

The policy support for the stressed sectors has been reaffirmed with the extension of timelines for TLTRO till Dec-21 and relaxation in some key financial parameters for the OTR under Covid. This will help in quicker resolution of some of the pending stressed exposures in the banking system.

Source : Equity Bulls

Keywords