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RBI likely to keep rates unchanged, continue accommodative stance.

Date: 06-04-2021
Subject: RBI likely to keep rates unchanged, continue accommodative stance
The pickup in the recovery has been the most impressive development in the recent times, the high frequency indicators such as composite PMI ranged between 55-58 (same as pre-covid levels), unemployment rate recorded at 6.9% after reaching high of 27% in May’20, mobility levels restored and E-way bills higher at an average of 2.0-2.3mn compared to an average of 1.2-1.8mn pre-covid has put India in a favorable spot.

However, since March India recovery has been hit by new headwinds. The resurgence of pandemic, rising oil prices and bond yields rising globally. With the cases rapidly rising in the second wave with doubling rate falling from 504 days to 202 days as of end of March and lockdowns mushrooming in certain parts there is a possibility the indicators which have continued to grow strong may show some loss in momentum, but the faster and mass rollout of vaccine from April onwards would help reach a cri ..

While the current resurgence would flatten out soon, the other two drivers could be worrisome. The oil prices are averaging out to be $60-65bp in 2021 against an average $40-45bp last year that’s 50% higher than last year’s cost. Not only this will add up to the increasing trade deficit but also likely to affect the entire economy impacting consumers and corporates. Consumers will perhaps face a double sting—higher pump prices (particularly if excise duties on oil aren’t cut), and corporates pas ..

In an already difficult environment where maintaining inflation within target range seems challenging, conducting large government borrowing with global yields rising adds to the challenge. While India has already witnessed FPI debt outflow of $2121mn during the calendar year 2020. The rising global yields could further lead investors to other economies with higher real interest rates and macro-economic stability. The real challenge is for the RBI as to how to conduct the borrowing for the gover ..

In its recent release of borrowing calendar, the government is set to borrow Rs 7.2tn in H1FY22 (60.1% of the full year budgeted target of INR 12.05 tn). The borrowing curve is skewed towards the 10-14Y segment with supply of 41.2%, followed by 30-40Y segment with a share of 27.5% and lastly in 2-5Y with a supply of 24.7%. Although the borrowing program is frontloaded in order to keep rates in check RBI as mentioned over and over again in its forward guidance is likely to continue with the open  ..

So, this puts RBI in a difficult spot with a lot of moving elements and makes the markets anxious about what could be the next possible steps of the central bank amidst the fast-changing environment. Will it withdraw excess liquidity without upsetting the market or hurting the recovery.

In such a situation RBI is expected to move gradually towards monetary policy normalization where on one hand short term rates may be pushed up to close the gap on negative real rates. On the other hand, it may continue to provide the support so that government borrowing cost doesn’t go up. While the support in terms of outright OMOs and operation twists are already in place the judgement on rates can only be taken after ensuring stability. This could possibly take place in 2HFY22 when the capex ..

As for the upcoming policy, RBI is expected to give a similar outcome as the last policy that is keep the rates unchanged, continue accommodative stance (on rate and liquidity) and keep close watch on inflation while ensuring growth.

For an Investor, with the central bank expected to remain supportive, the benchmark yields are expected to remain range as they have surged quite a bit(~15bps) after the budget announcement. While the cases surge, the recovery rate remains fairly supportive at ~95% and the vaccination drive should further help in bringing down this new wave. Economic recovery is still in a nascent stage and therefore it’s important that RBI continues to support the recovery process. Monsoon will play a key role  ..


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