8 Apr 2022

RBI Policy April 22 – RBI signals removal of accommodation and normalisation of LAF corridor

RBI kept rates unchanged but initiated steps to raise rates going forward. The focus is on removing excess liquidity from the system. G-sec yields will rise on expected rate hikes, lower liquidity, high g-sec supply and higher inflation. Corporate bond yields too will rise on rising government bond yields. Sensex, Nifty and INR will move on global risk conditions.

author dp
Team INRBonds
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RBI has kept the operational liquidity corridor as SDF or standing deposit facility at 3,75% and MSF or marginal standing facility at 4.25% The Repo rate at 4% will be the policy rate while the reverse repo rate at 3.35% will be largely inoperative. This will take up yields at the short end of the yield curve.

 

Inflation is expected to rise given sharp rise in commodity prices and  over the next few policies, RBI will start to hike rates and remove policy accommodation. Government bond supply will be heavy with around Rs 14 trillion of supply from centre and states, This will push up g-sec yields sharply higher at the longer end of the curve. The whole g-sec yield curve will shift up with a flattening bias.   

 

Policy highlights-

Ø Key rates-Policy repo rate kept unchanged at 4% with accommodative stance.

Ø It has been decided to introduce the Standing Deposit Facility (SDF) as the floor of the LAF corridor. This would provide symmetry to the operating framework of monetary policy by introducing a standing absorption facility at the bottom of the LAF corridor.

Ø The newly introduced Standing Deposit Facility (SDF) rate will be 25 bps below the policy rate i.e 3.75% at present. It will be applicable to overnight deposits.

Ø Both MSF and SDF will be available on all days of the week, throughout the year.

Ø The fixed rate reverse repo (FRRR) rate is retained at 3.35%.

Ø The liquidity measures offered in the view of corona pandemic will be withdrawn in a gradual and non-disruptive manner from this year.

Ø The present limit under Held to Maturity (HTM) category for banks has been increased from 22% to 23% of NDTL till March 31, 2023.

Ø Inflation -Inflation is projected at 5.7% in 2022-23, with Q1 at 6.3%, Q2 at 5.8%; Q3 at 5.4%; and Q4 at 5.1%.

Ø GDP growth-The real GDP growth for 2022-23 is projected at 7.2% with Q1:2022-23 at 16.2%, Q2 at 6.2%; Q3 at 4.1% and Q4:2022-23 at 4%.

 

Impact of MPC outcomes on bond yield

After the outcome of RBI MPC outcome, 10-year benchmark g-sec yield rose to 7% from 6.91% as of yesterday’s closing level.

 

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