RBI dovish accommodative stance cheers D-St; Inflation not a big worry, suggest experts

Indian markets, which was opened with a gap up on Wednesday, added gains after the Monetary Policy Committee (MPC) on expected lines kept benchmark lending rate unchanged for the 9th time in a row at 4 per cent.

The reverse repo rate under the Liquidity Adjustment Facility (LAF) remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the bank rate at 4.25 per cent.

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The MPC also decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward, said the RBI statement.

"Conceding that "there is considerable uncertainty in the growth-inflation dynamics" the MPC has again decided in favour of growth by continuing with accommodative monetary stance and status quo in rates,” Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.

“More importantly, the guidance also is dovish with no indications of a rate hike in the immediate future. The CPI inflation projection for Q3 and Q4 of FY22 at 5.1% and 5.7%, respectively, is an indication of RBI's belief that higher food inflation is temporary, since it is caused by crop damages during unseasonal rains,” he said.

Vijayakumar added that, in brief, a pro-growth policy and very positive from the market perspective

The RBI decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

RBI MPC Announcements Highlights

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Headline CPI inflation, which has been on a downward trajectory since June 2021, edged up to 4.5 per cent in October from 4.3 per cent in September on account of a spike in vegetable prices – due to crop damage from heavy rainfalls in October in several states, and fuel inflation – driven up by international prices of liquefied petroleum gas and kerosene.

On the inflation front, CPI inflation is projected at 5.3 per cent for 2021-22, 5.1 per cent in Q3, and 5.7 per cent in Q4:2021-22, with risks broadly balanced.

We have collated views from various experts on the outcome of the RBI policy:

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research

“While we had expected a partial likelihood of a modest hike in reverse repo rate in the Dec-21 MPC policy meeting, the central bank has stuck to its principle of ‘gradualism’ since the downside risks to a durable growth trajectory have clearly increased due to the spread of a new Covid variant.

MPC has retained the FY22 growth forecast at 9.5% but has slightly reduced the Q3FY22 GDP forecast to 6.6%, reflecting concerns on the global growth uncertainty along with high commodity prices.

Aditi Nayar, Chief Economist, ICRA Limited

Policy review maintained a complete status quo on the repo and reverse repo rates and the monetary policy stance, in line with our expectations, necessitated by the renewed uncertainty fuelled by the Omicron variant.

While a subtle shift has been brought in with the comment that price stability remains the cardinal principle of monetary policy, the overarching tone of the statement and forward guidance is less hawkish than what we had anticipated.

With the MPC remarking that the ongoing domestic recovery needs sustained policy support to make it more broad-based, we now foresee a slightly lower likelihood of our base case assessment that the stance will be changed to neutral in the February 2022 policy review.

Raghvendra Nath, MD of Ladderup Wealth Management

On expected lines, RBI has continued with its Accommodative stance towards the monetary policy and has maintained the repo rate.

It is the right decision at this stage as the Economy still needs a lot of support from the central bank to sustain the expected growth rates. Easy monetary policy by was of sufficient liquidity in the banking system and low interest rates shall play a crucial role in reviving demand and kickstart the capex cycle.

Moreover, inflation is not a big worry right now as most of recent spike in inflation is caused higher commodity prices that are driven by international factors and therefore shall remain unaffected by the RBI’s monetary stance.

The fear of coronavirus derailing the Economy once again through another wave is real and highly probable. These times requires high degree of monetary and fiscal support and the RBI is rightly dealing with it through its easy policy.

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank

The MPC expectedly maintained status quo on the policy rates and stance. The rhetoric too has remained focused on maintaining durable growth as long as inflation remains well in check.

We continue to expect RBI to fine tune the surplus liquidity to manage rates and consequently provide guidance on the operating target rate shifting closer to the Repo rate. We retain our base case of reverse repo rate hike in February.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)