On Friday, the RBI’s six-member Monetary Policy Committee is expected to keep the policy rate unchanged and retain its accommodative posture. While the policy stance is likely to remain growth-oriented, after the economy contracted by 7.3 percent in FY21, the lowest in four decades, all eyes will be on the RBI for any more targeted measures. The market will applaud regulatory measures, a liquidity cushion, and the unveiling of GSAP 2.0.
Investors should expect following things from this monetary policy:
To further stabilise and orderly evolve the bond yield curve, RBI may initiate GSAP 2.0. GSAP is an acronym for Government Securities Acquisition Program. Given the supply concerns coming from a shortfall in compensation cess revenues, Kotak Institutional Equities believes the RBI would need to declare a more aggressive GSAP 2.0 to reassure bond markets.
The central bank had announced bond purchases totalling Rs. 1 lakh crores under the GSAP 1.0. On April 15 and May 20, two rounds of bond acquisitions under the GSAP 1.0 were completed, totaling Rs. 60,000 crores.
The next GSAP tranche, as well as an indicative GSAP scale for the September quarter, could be released this week, just as the government disclosed intentions to boost FY22 borrowings by Rs. 1.58 lakh crores to compensate states for expected GST income shortfalls. As a result of the implicit yield management plan, risk-free rates will remain controllable and, as a result, private sector borrowing costs will remain low.
The RBI’s focus has shifted to a variety of targeted measures as policy rates have reached their lowest point. The central bank’s overall message is that it is in “battle readiness” posture, ready to take additional unorthodox, unique, and novel measures if the pandemic situation warrants it.
More steps may be announced this week in this regard, partially to address new demands from financial institutions, as the economic impact of the second wave will take time to manifest. Automotive dealers and real estate enterprises, for example, have requested a temporary moratorium for the length of the state-specific lockdowns for varied credit limits.
Selected banks are said to have requested a moratorium for the September quarter, allowing accounts to remain standard until the new recast window is activated in the December quarter. Large corporations and related industries would be closely scrutinised if they were to be included in the restructuring facility.
MPC members are expected to decrease growth expectations for FY22, according to Edelweiss. A slew of rating agencies, banks, and brokerages have slashed India’s GDP prediction for the coming year in recent days.
Moody’s expected India’s GDP growth to be 9.3% in FY22, while also stating that the second wave of the pandemic has increased credit profile concerns. SBI Research has lowered its GDP projection to 7.9% from 10.4% previously. India’s GDP growth is expected to be 10% in FY22, according to HDFC Bank, down from an earlier forecast of 11.5 percent.
In its April policy review, the RBI kept its forecast for FY22 GDP growth at 10.5 percent. The 10.5 percent figure was calculated based on their March assessment. Given this, many would be shocked if the 10.5 percent real GDP growth prediction for FY22 is not lowered. The first quarter has been a complete disaster.
WPI inflation rose to 10.49% in April, while retail inflation, which serves as a benchmark for monetary policy, was 4.29 percent. This is owing to the fact that the basket weights of both indexes are different. Rather than a large demand-driven rise, the difference is more of a supply-side issue.
The ability of producers to pass on increased input prices, which is doubtful at this time given weak demand circumstances, will determine how much high WPI inflation will spill over into CPI inflation.
In an unplanned speech last month, Governor Shaktikanta Das stated that the rest of the year’s inflation trajectory will be shaped by pandemic infections, the impact of localised containment measures on supply chains and logistics, and commodity prices. His thoughts on inflation would be interesting to hear.
Lockdowns have been prolonged into June while active pandemic cases have moderated. The impact of the second wave of pandemic infections, according to the RBI’s annual report, will be restricted to the June quarter, with some overflow into July.
“This is the most ideal view that can be imagined at this point – it offers a small period to establish strict pandemic guidelines and transportation, significantly increase operational plan and emergency aid, fill the gaps in the healthcare system, and develop investments, particularly of vaccines, in order to prepare for the next wave of infections,” the central bank said in its annual report for 2020.
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