India holds interest rates steady at record lows

The Reserve Bank of India kept rates steady at record low levels as widely expected on Friday and reiterated that it will continue to support the recovering economy by ensuring ample rupee liquidity in the banking system.

The repo rate or RBI's key lending rate was held at 4% while the reverse repo rate or its borrowing rate was left unchanged at 3.35%.

The repo rate has been cut by a total 115 basis points since March 2020 to cushion the shock from the pandemic, following a 135 bps reduction since beginning of 2019.

RBI Governor Shaktikanta Das said the MPC unanimously decided to keep rates on hold. He said that the economy's growth outlook had improved and that inflation was expected to remain within the RBI's targeted range over the next few quarters.

COMMENTARY

SAKSHI GUPTA, SENIOR ECONOMIST, HDFC BANK, GURUGRAM

"With significant government borrowings in the first-half, rising inflation risks, and lower liquidity surplus, bond yields are likely to remain under pressure, going ahead. We expect bond yields to trade between 5.95% and 6.10% in the second half of fiscal 2022."

"On inflation estimates, the RBI did sound some caution in terms of inflation risks in the year ahead and revised up its H1 inflation estimate to 5%-5.2%. We expect inflation to average at 5.3% in H1. Over the medium term, one must keep in mind that an expansionary fiscal policy is structurally inflationary and should be watched out for."

RADHIKA RAO, ECONOMIST, DBS BANK, SINGAPORE

"The RBI's assessment was nuanced, with FY22 growth estimate set at a firm 10.5% y/y while looking beyond the near-term cool off in inflation and flagging risks that core inflation might prove sticky owing to demand impulses from a revival in economic activity and higher commodity prices. The budget's investment and social sector orientation were seen as improving the quality of the fiscal math and as a positive for potential growth."

"Bond markets were met with some support, firstly an extension of the HTM enhancement to March 2023 and widening the investor pool by allowing retail investors direct access to gilts through the RBI, but an explicit OMO/OT announcement was absent, leading to a bearish reaction in bond prices. Cost of financing (risk-free rates) is, nonetheless, likely to settle at a slightly higher level as activity normalises."

"On liquidity, the RBI clarified that the overall stance was still accommodative whilst liquidity is likely to be withdrawn in a calibrated pace to prevent a dilution in the policy transmission. CRR normalisation remains on track, with a staggered restoration."

ANAGHA DEODHAR, CHIEF ECONOMIST, ICICI SECURITIES, MUMBAI

"We expect inflation to come down in the coming months. The MPC expects real GDP to grow 10.5% in FY22 and inflation to print at 5%-5.2% in the second half of fiscal 2022."

"On the regulatory front, the most important announcements are two-phased normalisation of CRR, extending HTM limit for SLR holdings, deferment of capital conservation buffer and allowing retail investment in gilts. Overall, the MPC's decision bodes well for growth and financial stability."

GARIMA KAPOOR, ECONOMIST - INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI

"Dispelling worries of possible hardening of market rates owing to the expected high supply of government bonds in FY22, the RBI today extended its accommodative stance to liquidity and hinted that it would stand pat to support the government's borrowing program."

"While there was no surprise with respect to the rate decision, we believe the decision to allow a retail investor to have direct access to participate in G-sec market is revolutionary and path-breaking."

"The RBI will have to walk a tight rope in FY22 in balancing growth-inflation dynamics amid a huge supply of government bonds."

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

"Given that the monetary policy framework is up for review in March, it made no sense to cut the policy rate in this meeting. For January, we expect the inflation to drop marginally to 4.4% yoy from 4.6%. More importantly though, with inflation heading decisively towards the RBI's median target of 4%, we are quite comfortable with our call of the next rate-cut during Q2 of 2020."

"Importantly, the RBI talked about supporting growth. We would likely see the RBI coming to the aid of the government, even in the fiscal space either by opting for debt monetization or sharing a portion of their excess reserve so that the fund can be used specifically for infrastructure development."

"This is all the more so given that we see a good possibility that the budgeted public capex for FY22 will fall short of the target unless the RBI gets into the act."

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

"The RBI kept policy rate on hold as expected and reiterated its accommodative stance. The operative word in today's (Friday) policy was the governor's reiteration of a previous statement that 'orderly evolution of bond markets was a public good'. The bank's inflation projection at 5% in the coming quarters reflects non-food price pressures currently seen in the economy which should keep the central bank watchful, even as economic recovery speeds up and liquidity remains bountiful on capital inflows as well as a large public borrowing programme."