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Experts take on monetary policy

Henil Shah
·4-min read

Reserve Bank of India (RBI) on February 5, 2021 came out with its final bi-monthly monetary policy for FY20. In this Monetary Policy Committee (MPC) meeting, the repo rate was kept unchanged thereby, maintaining its accommodative stance. However, it did plan to raise the cash reserve ratio (CRR) to its pre-COVID levels by May 2021. This would curb excess liquidity in the system and also help in controlling inflation. Having said, here is what experts have to say about the monetary policy.

Mahendra Jajoo CIO – Fixed Income, Mirae Asset Investment Managers (India) Pvt Ltd says, “In line with the evolving macro-environment, RBI policy maintained accommodative stance to support the nascent recovery but hinted at continued normalisation of liquidity. This likely indicated a gradual inching up of yields in due course but without disrupting the ongoing economic recovery in any way. Investors with asset allocation approach and long-term investment horizon may like to continue to remain invested but should expect elevated volatility in days ahead.”

He further added, “A major structural reform was also announced today. Retail investors can now open a direct account for government bonds. It may just be the beginning of a viable substitute for small savings schemes at market rates. However, much like sovereign gold bonds, likely pick-up pace will be at a slow rate.”

“RBI Monetary Policy of February 2021 was in-line with street expectations of maintaining status quo on rates and continuation of an accommodative stance”, says Naveen Kulkarni, Chief Investment Officer, Axis Securities.

He further believes, “Inflation target outlook for Q4 is largely in control, indicating unlikely hardening of interest rates in the near-term. GDP growth of FY22 is estimated at 10.5 per cent on the improved growth outlook. The normalisation of CRR in a phased manner will help in the gradual rationalisation of liquidity in the system.”

Further, talking above the post-budget MPC meeting expectations, he says, “Since it was the first monetary policy post the Union Budget, expectations were also on some specific guided plans on the government’s Rs 12 lakh crore market borrowing programme, which didn’t come by. Inclusion of NBFCs for On-Tap TLTRO will ease liquidity pains, especially for lower-rated NBFCs. Continuing to focus on regulatory reforms for shadow banks, this time, microfinance NBFCs, will strengthen the country's financial framework in the long run. Structural reforms by way of giving access to retail investors to primary, secondary government bond markets are also a welcome move. On a broader note, RBI continues to focus on maintaining liquidity for growth and supporting revival with softer interest rates, to keep the demand in the economy buoyant.”

Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund is of the view that “Liquidity management and normalisation are now likely to be graded and gradual to prevent any market disruption or impair financial stability. CRR, which was to be restored back to 4 per cent from the temporary 3 per cent introduced in March 2020, will now be done in a two-phased manner by 50 bps each in March and May 2021. RBI has reiterated the availability and keenness to use all policy tools to meet liquidity gaps if necessary, to allay any yield spike fears.

Relaxation in HTM limits on SLR securities which was raised to 22 per cent (in March 2020) for banks from 19 per cent earlier will now continue for another year until March 2023. This should help in managing the borrowing programme smoothly. RBI’s clear recognition that yield is a ‘public good’ benefitting everyone, is positive, which is likely to be an actively managed curve especially given the expansion in the government borrowing programme.

Inflation forecasts for Q4FY21 as well as for the first half of FY2022 and Q3FY22 have been revised marginally probably to factor in the return of growth recently and also the growth supportive budget, even as inflation prints have softened recently. Markets expectation for an OMO calendar did not come through, which is causing some nervousness in the backdrop of an all-time high borrowing programme for the next financial year.”

Furthermore, he says that, “We would continue to focus on shorter-term products within banking & PSU, as well as corporate bond fund categories, post today’s policy and the recent Union Budget.”