RBI-Monetary Policy Announcement
Repo rate, Reverse Repo rate and MSF unchanged at 4%, 3.35% and 4.25% respectively
Production
The accommodative stance of the MPC, complementary to the lower VAT and excise duty on crude oil and petroleum, is likely to cut the supply cost via provision of cheap raw material and continued affordable financing. This shall help in controlling inflation via capacity building and long run economies of scale.
Enhanced export and import of CAPEX following expected low interest rates indicate a strong and resilient growth in the consumer and capital goods industry. The status quo in interest rates is expected to especially fund and support small-scale industries, keeping in mind that the increased share of the states in borrowing against their respective GSDPs further eliminates supply-bottlenecks.
Consumption
Consumption is yet to regain momentum to return to pre-COVID levels. The primary culprit behind low consumption is sky-touching CPI inflation that is currently expected to be 5.3% for FY22, just below the MPC’s promised band of [2%,6%]. Crude oil prices have softened in the recent months (Normalized fuel prices); however, unseasonal rains and spiked vegetable prices (high food prices) still contribute toward rising headline inflation. Keeping unchanged liquidity adjustment rates can normalize the highly skewed core inflation in this regard.
Growth
Emerging consumption and rising production have expanded rural and urban demand, which is further expected to provide impetus to the y-o-y growth of 8%. The Indian economy grew at 20.1% and 8.4% in the first and second quarter of FY21 respectively; nevertheless, ongoing supply disruptions and emergence of the new COVID-19 variant Omicron has created a certain degree of uncertainty going forward. Heavy travel and trade restrictions, if materialized, can bring back industry-specific challenges.
The RBI has emphasized its bottoms-up growth-oriented approach by expressing concern over availing an affordable UPI based payments system for small retail businesses. Heightened digital payments following greater participation of service providers can catalyze small value transactions, further enhancing GDP growth figures. Additionally, the increased limit of digital IPO booking from 2 lakhs to 5 lakhs is expected to introduce numerous small-and-medium investors in the financial market.
The RBI has retained the growth target at 9.5% in FY22 after taking the above stated factors into consideration. Real GDP growth is projected to be 6.6% in Q3 FY22, 6% in Q4 FY22, 17.2% in Q1 FY23 and 7.8% in Q2 FY23.
Finance
The RBI is all set to return to normal dispensation under the Marginal Standing Facility due to the rare use of the facility. Consequently, banks will be able to dip up to 2% of Net Demand and Time Liabilities from 3%. The former 3% dip boosted market confidence in the unprecedented health-turned economic crisis. Here, the new 2% rate is evidence of the forbearance policy measures of the RBI. Additionally, the introduction of the option for banks to pre-pay the outstanding amount of funds under the Targeted Long term Repo operations 1.0 and 2.0 has attracted repayment of 1/3rd of the total amount (1.2 lakh crore) availed under the scheme.
VRRR auctions of longer maturity shall be used by the RBI to manage liquidity via funds absorption, beginning by auctioning VRRRs of 6.5 lakh crores and 7.5 lakh crores on December 17 and December 31 respectively.
The Governor reassured to maintain interest rates in line with the current global financial conditions via Operation Twist and OMO, speeding up the Transmission Mechanism. Further, the 50,000-crore fund for ramping up healthcare infrastructure and supporting contact-sensitive sectors shall not be continued post its terminal date of Mar’22. It is likely to turn out to be a pro-growth step by checking money supply in the economy.
Exchange
The announcements disclosed the maintenance of strong buffers by the RBI to fight off currency depreciation issues. The Governor emphasized on using sterilization in the domestic markets for the Monetary Policy to have a soft landing in the economy. By permitting banks to freely infuse capital in their overseas branches post BASEL-3 norms compliance, the RBI has taken a step forward in the direction of greater financial integration.
Where a paper on Investment-portfolio of banks is likely to supply banks with adequate and enriched information to further intensify financial autonomy as well as financial inclusion domestically, transition from LIBOR to ARR for External Commercial Borrowing and Trade Credit is expected to benefit Indian investors internationally with varied options.