RBI policy outlook: why the RBI may propose an action-free monetary policy for bond wallahs
The main reason is that we are in the middle of the second wave of the Covid pandemic, which has not completely subsided. Daily new cases have abated in most parts of the country, which is indeed encouraging. The vaccination campaign is underway across the country with daily vaccination doses of around 2 million per day currently.
From an economic point of view, high frequency indicators presently present a mixed picture. While mobility and sentiment indicators have moderated, activity indicators are showing resilience. WPI inflation touched 10.5% in April, while CPI inflation remained within the RBI’s projected range of 4.30%, the main monitoring factor for the RBI is the CPI, not the WPI , therefore monitoring the CPI on a monthly basis is the key to the future policy direction.
RBI already announced monetary and regulatory measures earlier in May (inter-policy) to alleviate potential issues from Covid-19. He also indicated that he was prepared to provide further flexibilities if the situation warrants it. We also expect the continuity of these measures in the coming policy. There is no expectation of any tariff action, although we would expect the political undertone to remain accommodating. Growth remains a priority for the central banker, as much as for the government.
There is no significant threat to inflationary pressure on the demand side due to the current pandemic situation, and the weak labor market and the resulting negative output gap. The market also expects a continuation of the GSAP (G-sec secondary market acquisition program); GSAP 1.0 was announced in the previous policy (INR 1 tn). We could see GSAP 2.0 being announced for the July-September 21 quarter for a similar quantum.
The GSAP has indeed been a powerful engine to keep the yield range in an easing bias and to ensure an orderly movement of the yield curve. We can also see additional measures in favor of SMEs (small and medium enterprises), MFIs (microfinance institutions) in addition to what RBI announced on May 5th.
On the risk front, RBI may appear cautious in the face of rising global commodity prices, especially crude oil. From the previous monetary policy to date, crude oil prices have increased by around 10%. The rupee over the same period has appreciated, although the net impact is still negative.
At the end of the day, RBI may choose to watch the situation evolve and prefer to play the game of waiting and watching rather than stepping up the pedal for the time being. Therefore, any significant change in growth or inflation forecasts seems unlikely at this time. This may be a no-action policy for bond wallahs, unless RBI decides to bring some pleasant surprises.
Lakshmi Iyer is Debt CIO and Chief Product Officer, Kotak Mahindra AMC.
The views are his)