RBI Delivers without a Policy Rate Cut

The slew of liquidity and financial market measures promises pre-Diwali cheer

As widely expected, the Monetary Policy Committee maintained status quo on the key policy rate, with inflation rate holding above the RBI’s comfort level. But the MPC brought pre-Diwali cheer by giving a ‘whatever it takes’ assurance to revive growth, as it looked at the “current inflation hump as transient”.

The 5:1 vote of the six-member MPC in favour of a continued accommodative stance “at least during the current financial year and into the next financial year”, also offered markets an extended comfort on rates and liquidity.

Key overhangs

The policy had to address three key overhangs weighing on markets. One, the RBI’s seemingly hardline stance on inflation, which has now eased with the current narrative opening up scope for further rate cuts. Two, concerns over the RBI reversing its liquidity stance to abate inflation worries. Three, the huge oversupply of Central and State government bonds slated to hit the market towards the end of the fiscal, exerting upward pressure on long-term bond yields. The slew of liquidity and financial market measures announced by the RBI considerably ease these concerns.

“The augmented borrowing programme for 2020-21 has been necessitated due to the exigencies imposed by the pandemic in the form of the fiscal stimulus and the loss of tax revenue. While this has imposed pressures on the market in the form of expanded supply of paper, the RBI stands ready to conduct market operations as required through a variety of instruments to assuage these pressures, dispel any illiquidity in financial markets and maintain orderly market conditions,” said RBI Governor Shaktikanta Das.

SBI Group’s Chief Economic Advisor Soumya Kanti Ghosh said: “Recourse to non-conventional policy tools has been the most innovative tool that the RBI has been using to manage financial stability in a most durable manner in the current challenging circumstances. Accordingly, the adjustment in risk weights, OMO in SDL, extension of co-origination model and enhanced HTM limits are measures that are bold and pragmatic.”

While conservatives will fret over both inflation and financial stability risks, Abheek Barua, Chief Economist, HDFC Bank, believes that the RBI has not gone overboard in its effort to support growth. “The Indian economy’s revival efforts are hobbled by the lack of adequate fiscal support. If the monetary policy does have to do the heavy lifting, it cannot do it within the confines of a conventional ‘take-no-risks’ framework,” he said.

“The RBI,” said Ananth Narayan, Professor at SPJIMR, “has managed the borrowing programme very well so far. The big measures announced yesterday send a strong signal that the RBI will ensure that yields are kept under check. Including T-bills, over ₹13-lakh crore of central borrowing is already done. Hence, the real concern was with SDLs, where only ₹3-lakh crore of borrowings has been completed so far. The OMOs of SDLs is a welcome move that will address the issue of oversupply of these bonds in the second half of the fiscal.”

Liquidity support

Radhika Rao, Economist, DBS Group Research, believes that the liquidity support for bond markets — Centre as well as State bonds – will be timely, helping to keep a lid on risk-free yields and, by extension, borrowing costs.