Tag: monetary policy

‘Focus on growth will continue’

Banking & Finance

[ad_1]

Read More/Less


The six-member monetary policy committee decided to maintain status quo on the policy repo rate to support growth, which has been laid low by the second Covid-19 wave , and to tackle inflationary pressures arising from rising global commodity prices, especially crude oil, and logistics costs.

RBI Governor Shaktikanta Das and Deputy Governors MK Jain, MD Patra, M Rajeshwar Rao, and T Rabi Sankar fielded questions from the media. Excerpts:

Why is RBI focussed only on supporting the 10-year benchmark Government Securities (G-Secs) in its market interventions?

Das: We focus on the entire yield curve, across maturities, and not just the 10-year G-Secs. Somehow there is a perception about the RBI being focussed only on 10-year G-Sec. For example, in the last G-SAP (G-Sec Acquisition Programme) auction, we had G-Secs across the maturity profile for purchase. The bond yields look inverted because there is abundant liquidity. So, naturally, the short-end (G-Secs) rates fall more than 10-year or 14-year rates. Therefore, the curve looks steep. But it is not so. If you look at the 10-year or the 14-year segments, the rates haven’t really gone up.

Whether 6 per cent yield on the 10-year G-Secs is sacrosanct, there is nothing like that. We have talked about an orderly evolution of the yield curve and we are focussed on that.

How will lower inflation print for April give you more elbow room?

Das: The inflation print for April at 4.3 per cent gives us elbow room. And elbow room means, it gives us space with regard to liquidity operations, enables us to step up liquidity infusion into the system.

With inflation being revised up, does it mean that policy normalisation will start?

Das: With regard to normalising the policy stance, there is no thinking at the moment. Our earlier CPI inflation projection was 5 per cent and now we have revised it to 5.1 per cent. This is not a significant upward revision.

What is your assessment of the impact of the second wave?

Das: Rural and urban demand was dented in the first wave. But the expectation is that the second wave has moderated (in terms of number of fresh cases)….Our assessment is that the impact of the second wave will be confined within the first quarter.…Our expectation is that from the second quarter, the overall demand position also will improve.

How long can you look through incipient inflationary pressures?

Patra: In several MPC statements, the analysis of inflation has been done. And the view of the MPC is that at this time the inflation is not persistent. It will turn persistent when it is backed by demand pull. At the current stage, we find the demand very weak and there is no demand pull in the inflation formation. It is mostly on the supply side and therefore we have chosen to look through. But we are very, very vigilant about demand pressures and we will keep on monitoring as and when demand pressures start feeding into the inflationary process.

How concerned are you about the pass through of WPI inflation into CPI?

Das: We are monitoring the the revival of growth — how growth is taking roots. We are monitoring the inflation dynamics…So, the MPC has consciously decided to focus on growth and give forward guidance in terms of the accommodative stance, spelling out what is meant by accommodative. So, the focus on growth will continue. The inflation, according to the MPC’s assessment, during the current year, is 5.1 per cent, which is well within the 2-6 per cent band.

Corporate loan book has not picked up and private capex revival has not started. What is your assessment and, based on the announcements today, is there no need for a stimulus package?

Das: We have not told banks to push credit. We discussed the credit flow in the earlier meeting…We have requested banks to implement the resolution framework. The RBI never tells banks to push credit. Credit flow depends on market demand and borrower profile and borrowing proposal. The dent on the economy is in the first quarter. From the second quarter, overall economic activity will pick up.

NPAs of banks will remain within the stress test of Financial Stability Report ?

Das: On NPAs, the projection (FSR said GNPA ratio may rise from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario; the ratio may escalate to 14.8 per cent under the severe stress scenario) we gave in the last FSR will be within that. The figures are manageable. We will spell out the details in the FSR.

Do you see a risk to the general government’s debt sustainability over the medium term?

Patra: Public debt will be about 90 per cent of GDP at the end of March 2022. Our assessment is based on the Domar condition of (public debt) sustainability, which requires that the growth rate of the economy should be higher than the interest rate at which the government services the debt, that condition is fulfilled as of now. The level of debt-to-GDP is set to decline over the next six years. So public debt is sustainable.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , ,

RBI monetary policy: Calms some nerves; just what the doctor ordered

Banking & Finance

[ad_1]

Read More/Less


Through the variable reverse repo, RBI will also manage the lower end of the curve suitably.

By KVS Manian

The Reserve Bank of India (RBI) has clearly kept its ears to the ground in framing the last monetary policy. The surge in Covid-19 cases, leading to a seemingly vicious second wave, has definitely pushed the recovery trajectory by a quarter, if not two.

The pace of the Covid-19 vaccination has been slower than anticipated, adding to the worries on the time frame to get a control over the pandemic. Just now, in the most optimistic scenario, this looks like a 9-10 month vaccination programme to reach the thresholds of comfort. I am sure the government is thinking about speeding up the delivery mechanisms, as also ensuring optimum supply of vaccines itself. So, over the next few months, selective lockdowns/locational disruptions and other constraints will continue. This will lead to some demand disruptions as well as supply disruptions.

All this is bound to have an adverse impact on the economy, with some downside risk to the growth projections we had expected, even a month ago.

In such a scenario, that the RBI stance will be more accommodative and supportive of growth follows quite naturally. As all the countries attempt to do this over the next 12 months, we will see significant difference in the quality of execution amongst them.

Hopefully, India will be one of the countries that will emerge from this year with a strong tailwind ready to launch into a strong positive growth cycle.

Like most other central banks across the world, RBI is also clearly prioritising growth over incipient inflation worries. However, this remains a risk over the period of this financial year. While the headline inflation looks to be under control, the saviour has been the inflation in food prices, and core inflation numbers are already flirting with 6%. The risk to inflation is coming in a complicated manner, both from supply-side constraints in some areas and from demand-side pressures in others. This balancing act between supporting growth and curbing inflation is going to be the key challenge of the central bank this year.

The bond markets were very pleased with the announcement of the Rs 1 lakh crore open market operation (OMO) programme (christened as G-SAP, or the G-Sec Acquisition Programme) for the first quarter of FY22. It was precisely what the doctor ordered. This has cooled the yields over the long end of the curve. Through the variable reverse repo, RBI will also manage the lower end of the curve suitably. This may lead to some increase in yields in the short end, flattening the yield curve. The liquidity in the system will continue to be good, and with the above developments, the expectations of rise in policy rates over this year have significantly receded till late this financial year.

It will be interesting to see how the rupee reacts in the coming months. Global liquidity leading to strong flows into the Indian equity markets has helped bolster the rupee until now. Purportedly, RBI’s announcement of bond purchases and unwinding of positions by traders, who were already nervous due to the emerging Covid-19 second wave data, led to a fall in the value of the rupee. However, in the medium term, signals from the US and European markets on economic recovery and interest rates will be a more important factor. Just now, the US Treasury as well as European central banks seem quite determined to keep liquidity high and bond yields low, almost challenging the bond dealers to trade against them. Given these, the flow into attractive emerging markets is likely to continue, keeping the rupee reasonably stable.

The not-so-great news in all this is that the likely economic disruptions, caused by the next wave of Covid-19, could mute credit growth at a juncture when it was just showing green shoots of recovery. Asset quality issues in the financial sector could re-emerge. Coordinated steps by both the government and RBI through the last year helped ensure flow of credit and financial support to the segments in the economy that were the most susceptible, such as the MSMEs and other Covid-19-impacted sectors, and helped these segments tide through the crisis. Going forward, RBI and the government have to work towards a calibrated and smooth exit from this situation.

Another important announcement from RBI was that of permitting fintech companies to join the digital payment systems of the central bank. This is a progressive step, and will speed up digital adoption in financial transactions. India’s progress in this direction has been particularly noteworthy, and this announcement has signalled RBI’s continued and proactive focus in this area.

Overall, the policy is in sync with the times and recognises the need to navigate this uncertain period with an open mind.

The author is whole-time director and member of Group Management Council at Kotak Mahindra Bank. Views are personal

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , ,

A ‘Shakthi’ dose from the RBI

Banking & Finance

[ad_1]

Read More/Less


 

Finance Ministers generally look for endorsement of their Budget exertions from two entities — the stock market and the central bank. The first comes right away, practically simultaneously, alongside the Budget. The second, from the central bank, comes in its monetary policy announcement immediately following the Budget.

Various stakeholders draw their cues from the signals that come from these two informed assessments. While market reactions are easily gauged by index and individual stock movements, the central bank’s statement and the Governor’s comments are carefully parsed. They are read to detect if the central bank is fully on board with the government plans or whether there are any reservations. Of course, even when there are misgivings, they are always couched in mild and respectful language.

The Finance Minister’s Budget has got the unequivocal thumbs up from both this time. The market was up by a whopping 5 per cent in a single day — impressed apparently by the focus on growth, infrastructure spending, privatisation plans and the attempt at transparency on the fiscal deficit numbers.

Today, the RBI monetary policy committee has provided its own support. It has left the key repo rate unchanged at 4 per cent. The RBI has already cut this rate by 250 basis points over the past two years, with about 115 bps of this coming in the past year in response to the pandemic. The policy guidance is in line with its stance of remaining ‘accommodative’ as long as necessary. Inflation numbers as evidenced by the movement in consumer price index (CPI) are relatively mild and within the comfort zone for the central bank. The projected CPI for the first half of the next year also reflects an easing to a range of 5 per cent and moving further down to 4.3 per cent in the third quarter.

Facilitating massive borrowing

The key question in this policy was what the RBI would say about the government borrowing programme. The government is set to borrow about ₹12 lakh crore or about ₹25,000 crore every week in the next year. The RBI has provided an assurance that it will manage it in a non disruptive manner. This was par for the course.

And then the RBI pulled out a rabbit from its hat by announcing direct retail participation in government bonds buying through the RBI. This is no doubt a very important step — and at least in theory, helps diversify the lender base for the government. In the long run, this may help provide more stable interest rates for both the government and the entire economy. This is also a good option for high networth individuals who may be uneasy with the vertiginous climb of the stock market indices currently.

However, it bears remembering (even as one receives the news with optimism) that past experience with regard to fostering retail participation through various other agencies have been lukewarm. Also, these measures, welcome as they are, will take time to fructify. It may be a bit too much to expect that retail investors are going to queue up and jostle outside RBI doors to buy government bonds this year (like they did to return old currency notes four years ago !)

The economy is set to begin recovering from the troughs of the past two years. As the Governor put it succinctly in his concluding remarks, the only way for the economy to go now is — up. How the RBI handles the massive borrowing programme as well as rising corporate demand for credit — without letting interest rates get out of hand — is going to be it’s biggest challenge in the year ahead. The bond markets remain sceptical if the initial movements are any indication.

(The writer is a Mumbai-based freelance journalist)

[ad_2]

CLICK HERE TO APPLY

One comment , , , , , ,

MPC expected to retain policy repo rate at 4%: CARE

Banking & Finance

[ad_1]

Read More/Less


The Monetary Policy Committee (MPC) is expected to retain the policy repo rate at 4 per cent owing to the concerns around core inflation, CARE Rating said in a report.

In this regard, the credit rating agency also pointed to the widening fiscal deficit and normalisation of economic activities, which could weigh on the inflation outlook

CARE expects the accommodative monetary policy to continue.

The Reserve Bank of India (RBI) will be announcing the results of voting on the repo rate and monetary policy stance by the six member MPC on February 5, 2021.

The policy repo rate, which is the interest rate at which banks borrow funds from the RBI to overcome short-term liquidity mismatches, has remained unchanged since the last cut in May 2020. There was a cumulative reduction of 115 basis points (bps) during the March to May 2020 period from 5.15 per cent to 4 per cent.

The agency observed that retail inflation, which remained elevated and above the RBI’s flexible inflation target (4 per cent +/- 2 per cent) for 8 consecutive months, registered a perceptible fall in December 2020 to 4.6 per cent, which is at a 15-month low. The decline in retail inflation can be broadly ascribed to fall in food prices and high statistical base effect.

“Core inflation (excludes food and fuel) for December 2020 stood at 5.7 per cent and it has remained range-bound from July 2020 onwards. Elevated core inflation continues to remain a challenge for the RBI’s MPC,” said Sushant Hede, Associate Economist.

CARE expects retail inflation to move towards 5.5 per cent by March 2021. With the Economic Survey and Budget 2021-22 already providing its estimates on the growth outlook for the Indian economy, growth projections from the RBI for the coming fiscal will be closely monitored, it added.

The agency observed that pursuant to the projection of a resilient V-shaped recovery in the Indian economy by the Indian Economy Survey, albeit on a lower size of the economy and the large government market borrowing program announced in the Budget for both the Centre and States, the RBI’s policy action will focus on balancing liquidity in the financial system while keeping inflation within its target band.

 

[ad_2]

CLICK HERE TO APPLY

Leave a comment , ,
1 2