RBI Policy

Oct 8th 2021

RBI policy review – RBI focuses on Rs 13 trillion excess money-Oct 21

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RBI kept interest rates unchanged and maintained an accommodative stance on the back of lower than expected reading of CPI inflation in the last 2 months. However, with a liquidity overhang of Rs 13 trillion, RBI is focusing on calibrating the excess money and this will drive bond markets going forward.

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Arjun Parthasarathy

Liquidity measures drive bond yields higher

The RBI Governor Dr. Shaktikanta Das chose to focus on liquidity even as policy rates and accommodative stance were maintained. RBI estimates that the liquidity overhang is around Rs 13 trillion, which could lead to financial markets instability through asset price bubbles.

The macro economy is looking good with inflation projected at 5.3% for the full year on the back of record food grains output, fiscal deficit at 18-year lows for the April-August 2021 period, exports crossing USD 30 billion for the 7th straight month, current account in surplus and corporates generating strong earnings growth as seen by record levels of the Sensex and Nifty. Aggregate demand is rising and capex to meet the demand is evolving. Banks balance sheets are healthier with stresses corporates able to pay back loans on better commodity prices and pick up in demand.

There is still supply shortage with logistical issues and on China closing down polluting industries. Global oil prices have risen to multi year highs and rising demand during festive season will increase the demand supply gap leading to higher product prices and higher inflation.

RBI has stopped its bond buying program, the G-SAP, and is conducting variable rate reverse repo operations (VRRR) to keep liquidity in check and prevent it from bubbling over.

Bond markets will initially view the stopping of bond purchases as negative and will take up bond yields but with improved macros, bond yields will stabilise at higher levels.  

Key Highlights

Ø Key rates-Policy repo rate kept unchanged at 4% while the reverse repo rate also remained unchanged at 3.35%.

Ø Inflation -CPI inflation is projected at 5.3% during FY22, 5.1% in Q2, 4.5% in Q3 and 5.8% in Q4 of 2021-22. CPI inflation for Q1:2022-23 is projected at 5.2%.

Ø GDP growth-GDP growth projection is retained at at 9.5% in FY22, 7.9% in Q2 and 6.8% in Q3, 6.1% in Q4 of FY22. Real GDP growth for Q1FY23 is projected at 17.2%.





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