Tag: MPC

Monetary Policy Committee revises FY22 retail inflation projection to 5.3%

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The Monetary Policy Committee (MPC) revised its retail inflation projection for FY22 downwards to 5.3 per cent against the earlier 5.7 per cent even as it retained its projection for real GDP growth at 9.5 per cent.

If the downward revision in retail inflation projection materialises “and growth gathers further momentum”, it could set the stage for a hike in the policy repo rate, say economists.

RBI Governor Shaktikanta Das observed that consumer price inflation softened during July-August, moving back into the tolerance band with an easing of food inflation, corroborating the MPC’s assessment of the spike in inflation in May as transitory.

“Improvement in monsoon in September, the expected higher Kharif production, an adequate buffer stock of foodgrains and lower seasonal pickup in vegetable prices are likely to keep food price pressures muted,” he said.

Also read: RBI Gov hints on ‘gradual’ unwinding of exceptional liquidity measures

The Governor noted, “Core inflation, however, remains sticky. Elevated global crude oil and other commodity prices, combined with an acute shortage of key industrial components and high logistics costs, are adding to input cost pressures. Pass-through to output prices has, however, been restrained by weak demand conditions. The evolving situation requires close vigilance.”

Das opined that overall, the aggregate demand is improving but slack still remains; output is still below the pre-pandemic level and the recovery remains uneven and dependent upon continued policy support. Contact intensive services, which contribute about 40 per cent of economic activity in India, are still lagging.

Supply-side and cost-push pressures are impinging upon inflation and these are expected to ameliorate with the ongoing normalisation of supply chains. Das felt that efforts to contain cost-push pressures through a calibrated reversal of the indirect taxes on fuel could contribute to a more sustained lowering of inflation and anchoring of inflation expectations.

GDP growth

The MPC retained its projection for real GDP growth at 9.5 per cent in 2021- 22. In this regard, the Governor said, “Recovery in aggregate demand gathered pace in August-September… The ebbing of infections, together with improving consumer confidence, has been supporting private consumption. The pent-up demand and the festival season should give further fillip to urban demand in the second half of the financial year.”

Also read: RBI proposes framework for offline digital retail payments

Das observed that rural demand is expected to get impetus from continued resilience of the agricultural sector and record production of kharif foodgrains in 2021-22 as per the first advance estimates. Further, the improved level in reservoirs and early announcement of the minimum support prices for rabi crops boost the prospects for rabi production.

The support to aggregate demand from government consumption is also gathering pace. “Improvement in government capex, together with congenial financial conditions, could bring about an upturn in the much-awaited virtuous investment cycle… Recovery in the services sector is also gaining traction,” the Governor said.

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Yields harden as liquidity concerns outweigh positive news

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Benchmark yields rose 5 basis points last week compared to the previous one pushed up by concerns on the liquidity front despite a slew of positive news.

The week commenced with the FY22 second-half borrowing calendar coming in at ₹5.03-lakh crore, which was well within the anticipated level. Then came the fiscal deficit number for April-August at 31 per cent of the Budget Estimate. The GST collections for September also came in at ₹1.17-lakh crore which is 23 per cent higher compared to the same month last fiscal.

However, yields continued to move higher as concerns on the liquidity front took precedence. For one, the cut-off on the seven-day variable rate reverse repo auction came in at 3.99 per cent last week. Compared to this, the cut-off on the 14-day variable rate reverse repo auction was at 3.6 per cent the week before.

This implies that the RBI is gradually getting comfortable paying a relatively higher rate in order to suck out the excessive liquidity sloshing around in the system.

Rate review

Bond market participants are wary that the central bank will raise the variable rate reverse repo (VRRR) auction quantum as well as the tenors and also raise the fixed reverse repo rate in the upcoming Monetary Policy.

Ananth Narayan, Professor-Finance at SPJIMR, said a lot has happened over the past few weeks that wasn’t conducive for the bond market. “Commodity prices have shot up, there have been energy shortages around the world, mainly China and the UK, and the whole confusion about the US debt ceiling also added pressure on the US treasury yields.

“As we worry about cost-push and imported inflation, the concern is whether the RBI might start reducing G-SAP and raising overnight rates next week. I believe the central bank would not want to shock the markets. They may increase the VRRR and suck out some of the excess liquidity, but would also comfort the market that the liquidity would remain on the surplus side for much longer. I think it would be a surprise if the benchmark yield goes beyond 6.30 per cent in the short term,” Narayan said.

The 10-year US treasury yield also went up to 1.56 per cent last week before cooling to 1.46 per cent. With the benchmark yield hitting 6.24 per cent, bond traders expect the yield to find solace close to the 6.3 per cent level. All eyes are now on the Monetary Policy where the crucial thing to watch out would be any potential changes in the VRRR quantum, tenor as well as the fixed reverse repo rate.

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83% of RBI’s MPC statements had net negative sentiment : Study

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Negative sentiment had dominated the statements of RBI’s Monetary Policy Committee (MPC) since its first meeting in October 2016 to the latest one in August 2021, according to a sentiment scoring analysis done by professors of Great Lakes Institute of Management, Chennai.

The communication sentiment study of RBI’s MPC statements, done by professors Vidya Mahambare and Jalaj Pathak, was based on analysis of 180 statements of MPC members related to 30 meetings (6 member statements per meeting) held between October 2016 and August 2021.

Negative sentiment

“An overwhelming majority over 83 per cent (149 out of 180 MPC member statements) have a net negative sentiment, reflecting up until 2019 the weak domestic economic environment and from March 2020 the adverse sentiment as a result of the Covid pandemic,” the analysis found.

The study used an improved sentiment analysis technique which assigns a positive or a negative net sentiment score for each statement which is then averaged for every meeting. A negative score can arise due to concerns related to lower domestic/global growth and/or higher inflation and inflation expectations, financial instability, and vice-a-versa for the positive score.

The researchers said that since communication sentiment is not directly quantifiable, researchers have begun to use text analysis techniques to convert the qualitative information contained in central banks’ communication such as monetary policy statements and central bankers’ speeches, into a quantitative indicator.

Also read: MPC Minutes: ‘Not for extended accommodative stance’

“However, there hasn’t been such sentiment analysis of the statements of the Monetary Policy Committee (MPC). This research note is the first attempt to quantify and compare net sentiment in statements of MPC members of India’s central bank, the RBI,” the authors noted.

Out of 30 MPC meetings held until August 2021, the average MPC communication sentiment is negative for 26 MPC meetings, marginally positive for 1 (October 2016), and nearly neutral for 3 meetings (December 2016, April 2018, and February 2021), the report found.

However, the report added that the longest consecutive worsening of the negative sentiment in six MPC meetings was in the pre-Covid period from August 2018 to June 2019.

“Before the pandemic hit, the communication sentiment had begun to improve but hit the lowest point in the statements of March -2020. Since October 2020 once again the sentiments expressed in the MPC statements had improved, before deteriorating again in April 2021 on the expectation of the second wave,” the report said.

“The average net sentiment in the MPC statements remained negative and marginally worsened in the latest August 2021 meeting,” the report concluded.

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Taxes on fuel trigger worry at RBI policy panel’s meet, BFSI News, ET BFSI

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MUMBAI: The government’s move to pass on increases in global crude oil price to consumers, but prevent corrections through higher taxes, has raised concerns on inflation among the Reserve Bank of India‘s (RBI’s) monetary policy committee (MPC) members.

The minutes of the MPC meeting released on Friday reveal that, worried by inflation, one member, J R Varma, had voted to raise the reverse repo, the rate at which banks lend to the RBI. This rate is outside the remit of the MPC, which votes only on the repo rate, the rate at which banks borrow from the RBI.

High domestic price of fuels has triggered worries over stubborn price pressures and there have been demands to reduce taxes to help calm prices of petrol and diesel across the country.

Finance minister Nirmala Sitharaman has blamed the burden of UPA-era oil bonds as an obstacle to bringing down fuel prices. She has said that if she did not have the burden to service the oil bonds, she would have been in a position to reduce excise duty on fuel.

Earlier, RBI governor Shaktikanta Das had also said that diesel and petrol prices act as cost-push factors across a range of activities. “It’s not just that passengers who use cars and bikes. High fuel prices also have an impact on the cost of manufacturing, transportation and other aspects,” Das had said in a speech in February.

While retail inflation has shown some signs of moderation in July, wholesale price inflation continued to remain in double digits for the fourth consecutive month. Stubborn inflationary pressures have prompted the RBI to pause its rate-cutting cycle, although it has promised to keep an easy stance to help support growth and nurse the economy to a high growth trajectory.

The minutes reveal that Das made a strong pitch for continuing monetary policy support, citing slack in the economy and inflation being driven by supply-side factors. “Continued policy support with a focus on revival and sustenance of growth is indeed the most desirable and judicious policy option at this moment,” said Das, making a case for maintaining status quo. “On the whole, the economy still requires support in terms of maintaining congenial financial conditions and fiscal boosters. At such a critical juncture, can we really pull the rug and let the economy tumble?” said Das.

RBI ED Mridul Saggar estimated that the excise duty hike itself may have pushed headline inflation higher by 60-80 basis points (100bps = 1 percentage point), adding to cost-push inflation. Saggar, who along with the others voted for status quo, highlighted the significance of narrative economics in difficult times in producing business cycle movements endogenously.

The views of external members reveal that, while all are keen to support the economy, there is some divergence in respect of their view on inflation. External member Ashima Goyal said that if indirect taxes impart persistence to inflation, it could de-anchor inflation expectation and pose challenges to monetary policy. Pointing out that fuel prices do not fall with international prices, she said, “A persistent rise in Indian fuel prices is at odds with inflation targeting.”

Varma, who argued for withdrawing the accommodative stance, said, “Persistent high inflation means that the monetary accommodation has to be somewhat restrained and, therefore, I argued for raising money market rates towards the repo rate of 4%.”

Barclays economist Rahul Bajoria said that the minutes indicate a shift within the MPC’s narrative and, while the overarching view remains consistently to support the economic recovery, the comfort with inflation dynamics is certainly shifting within the MPC members. He added that there also appears to be a slight divergence visible on inflation persistence between the internal and external members. “But we reckon this gap is unlikely to be sustained, as more inflation prints come through,” he said.



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RBI says inflation is on track to meet projections, BFSI News, ET BFSI

Banking & Finance

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Inflation is likely to remain within the Reserve Bank of India‘s (RBI) projected levels for the rest of the year, it said on Tuesday while highlighting that inflation containment comes at the cost of economic growth.

Earlier this month the RBI raised its 2021/22 inflation forecast to 5.7% from 5.1% and reiterated that it will continue to keep monetary policy accommodative as long as necessary to revive and sustain growth on a durable basis.

The retained stance and increased inflation forecast started a debate over whether monetary policy has forsaken its primary mandate of price stability in the face of the continuing COVID-19 pandemic.

The RBI is mandated to bring down retail inflation to 4% over the medium term while keeping it within a range of 2-6%, a band it has breached twice this year.

Inflation is on the central bank’s envisaged trajectory and likely to stabilise over the rest of the year, the RBI said of what it described in Tuesday’s bulletin as “a credible forward-looking mission statement for the path of inflation”.

“The MPC demonstrated its commitment and ability to anchor inflation expectations around the target of 4% during 2016-2020. The once-in-a-century pandemic ratcheted up inflation all over the world and India was not immune,” it added.

“Our MPC is India-focused; it has to be. It must choose what is right for India, emulating none, not emerging nor advanced peer,” the bulletin said.

A reduction in the rate of inflation can be achieved only by reduction in growth; an increase in growth is only possible by paying the price of an increase in inflation, always and everywhere, the RBI said.

Easing of pandemic-related restrictions and ongoing vaccination programme has helped to boost demand conditions while improving monsoon and rising agricultural sowing activity is improving supply conditions in the economy.

“The MPC voted to give growth a chance to claw its way back into the sunlight,” the RBI said.



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MPC voted to give growth a chance to claw back into the sunlight: RBI Bulletin

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The Monetary Policy Committee (MPC) voted to give growth a chance to claw its way back into the sunlight, according to an article in the Reserve Bank of India’s latest monthly bulletin.

The MPC’s decision — to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4 per cent and continue with the accommodative stance — is backed by all available evidence – mobility-, activity- and survey-based, according to the article ‘State of the Economy’.

 

“Yet it is, in the ultimate analysis, a judgement call because at the heart of the association between growth and inflation, a sacrifice is embedded,” according to the article put together by 23 RBI officials, including Deputy Governor MD Patra.

The authors observed that a reduction in the rate of inflation can only be achieved by a reduction in growth; an increase in growth is only possible by paying the price of an increase in inflation, always and everywhere.

 

“Called the sacrifice ratio in economics, the latest estimates for India suggest that for a one percentage point reduction in the rate of inflation, 1.5-2 percentage points of GDP growth have to be foregone,” assessed the authors.

The authors posed the question: “But what if the MPC doggedly attacks the supply shock induced price pressures in spite of the current state of the pandemic-ravaged economy and as a consequence, economic activity wilts into depression?”

The authors emphasised that no amount of humility will wipe away the tears then.

“Also, our MPC is India-focused; it has to be. It must choose what is right for India, emulating none, not emerging nor advanced peer,” they added.

The article noted that so far, inflation is on track to staying within the trajectory envisaged (average 5.7 per cent in FY22) and it is likely to stabilise during the rest of the year.

“In our view, this is a credible forward-looking mission statement for the path of inflation,” the authors said.

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Bankers view on RBI’s policy, BFSI News, ET BFSI

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Dinesh Khara, Chairman, SBI said, “The RBI policy is pragmatic and strikes a fine balance between stance and strategy. While the policy stance continues to be accommodative to continuously support growth, a strategy of careful recalibration of liquidity management is clearly indicated with the roll out of VRRR.

Dinesh Khara

The policy has also nudged banks to shift to an alternate reference rate with the discontinuation of LIBOR. The extension of the on-tap TLTRO scheme and the deferral of the deadline for meeting the operational parameters for stressed entities will help corporates navigate through the pandemic with a degree of certainty.”

Rajni Thakur, Chief Economist, RBL Bank said, “MPC announcements were pretty much on expected lines with key rates held constant and upward revision of inflation forecasts for the current fiscal year.

Policy bias in favour of nurturing growth continues and there was a strong denial of any urgency to scale back monetary support on account of higher inflation or potential global normalisation.

While enhanced VRRR quantum and one voice of dissent can be seen by market as mildly dovish, in all likelihood, RBI has kept its options open to support growth should the third wave disrupt nascent momentum or to use monetary tools to begin normalisation if growth -inflation dynamics start to get complicated.”

Rajni Thakur
Rajni Thakur

On similar lines, Siddhartha Sanyal, Chief Economist and Head – Research, Bandhan Bank said, “While the status quo on rates with a 6-0 voting and continued “accommodative” stance were on expected lines, the split voting as regards the policy stance was a modest surprise. Still, the overall tone of policy continued to focus clearly on supporting growth recovery.”

“Given higher global commodity prices, sticky food inflation and rise in domestic fuel prices, inflation may stay higher than for the RBI’s comfort. However, with the tentative and uneven nature of recovery, one expects the MPC to continue prioritizing supporting growth in the coming months.”

Sidharth Sanyal
Sidharth Sanyal

Indranil Pan, Chief Economist – YES BANK said, “RBI has attempted and managed to balance the contradicting objectives of managing inflation expectations while also communicating the need for sustained policy accommodation.

Even as the inflation forecasts for the current FY have been raised, the communication continues to be that the hump in inflation is supply-led and thus ‘transitory’ wherein the demand side push for inflation is almost absent. This is the reason for RBI to have been able to see-through the current high inflation levels.

RBI continues to highlight that any pre-emptive tightening can kill the nascent and hesitant recovery that is taking shape. In cognizance with an extremely uncertain growth climate, we think that the RBI will maintain its accommodative policy and not move on any form of tightening – be it on the rates side or on the liquidity side – till the end of the current FY.”

Yes Bank
Yes Bank

While A. K. Das, Managing Director & CEO, Bank of India has a positive outlook. He said, “Continued accommodative stance of RBI is expected to catalyze growth in real segments in a strong, broad based and sustained manner”.



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MPC maintains status quo on key rates

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The Monetary Policy Committee has decided to keep key rates unchanged amidst rising inflationary pressures.

“The MPC voted unanimously to keep the policy repo rate unchanged at 4 per cent. It voted with a 5:1 majority to continue with the accommodative stance as long as necessary to support growth,” RBI Governor Shaktikanta Das, who chairs the MPC, said on Friday after the bi-monthly meeting.

The six-member MPC has kept the repo rate (the interest rate at which banks borrow from the RBI to overcome short-term liquidity mismatches) steady at four per cent since it last cut this rate by 40 basis points from 4.40 per cent in May 2020.

Retail inflation has remained for two consecutive months above the RBI’s upper target range of six per cent. It stood at 6.36 per cent in June.

The MPC met in the shadow of the two recent inflation trends above the tolerance band of inflation target, Das said, adding that economic activity has broadly evolved in line with expectations in June and the economy is recovering from the second wave. Monsoon is doing well and some high-frequency indications are picking up.

Economic activity is likely to gather pace with progressive vaccination, he further said.

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Decision-day Guide, BFSI News, ET BFSI

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By Anirban Nag

India’s monetary policy makers are likely to leave interest rates untouched for a seventh straight meeting, as their focus remains more on fixing a fickle economy than on controlling stubborn price pressures.

The Reserve Bank of India’s six-member Monetary Policy Committee is meeting amid weak indicators raising doubts about the economy’s ability to sustain a nascent recovery. Some parts of the nation, where the fast-spreading delta variant was first identified, are still battling a rise in Covid-19 infections with researchers warning of an impending third wave of the pandemic.

All 21 economists surveyed by Bloomberg as of Wednesday afternoon expect the MPC to leave the benchmark repurchase rate unchanged at 4% on Friday. While the RBI is widely expected to announce another tranche of its so-called government securities acquisition program, bond traders will be watching for any cues on return to policy normalization.

For now, Governor Shaktikanta Das has maintained that growth is the main challenge and that inflation, while sticky, is only a “transitory hump.”

Here’s what to watch for in the MPC decision to be announced by Das in Mumbai on Friday morning:
Inflation ‘Chameleon’
The governor is likely to bump up the RBI’s inflation forecasts, given the ripple effect of a sustained rise in input costs along with high fuel taxes.

Headline inflation is already hovering well above the upper tolerance limit of the central bank’s 2%-6% target band, and some economists see the measure breaching the RBI’s 5.1% outlook for this fiscal year to end up in the region of 5.5%, or thereabouts.

“Several inflation drivers have come and gone,” said Pranjul Bhandari, chief India economist at HSBC Holdings Plc. in Mumbai. “But inflation has stayed elevated, like a chameleon, adapting itself rather quickly to the driver of the day. In recent months, price pressures have spread widely across the food and core baskets.”

Growth Prospects
The central bank is likely to retain its growth estimate of 9.5% for the year to March 2022.

A slew of high frequency indicators from purchasing managers’ surveys to mobility indicators and tax collections indicate a rather uneven recovery from the pandemic’s second wave. Hopes that the monsoon rains, which have been below normal in July, will pick up in the August-September period and provide a boost to rural demand is likely to provide some comfort to policy makers who are focused on reviving growth.

Normalization or Not?
With inflation running near the upper end of the RBI’s target and the economy showing signs of a recovery, bond investors are of the view that the central bank could signal when it intends to start unwinding some of its extraordinary easy policy.

Although Das has reiterated that normalization is not on his mind yet, economists are of the view that stubborn inflation could force his hand.

Withdrawing some of the excess funds in the banking system via longer dated reverse repo auctions — an action it took at the start of the calendar year — could be a start of that process. Bloomberg Economics estimates excess cash is at over 8 trillion rupees ($107.8 billion).

RBI's policy rates anchored at lows despite inflation: Decision-day Guide
“The RBI could re-announce the long tenor variable rate reverse repo auctions as the first step toward normalization,” wrote Samiran Chakraborty, chief India economist at Citigroup Global Markets in Mumbai. “Beyond that, the MPC is unlikely to provide much guidance on the timing and pace of normalization.”



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‘Focus on growth will continue’

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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.

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