First, the “communication” function. Going into the policy review, the market is sure that the indicators indicating interest rates, repo rate and reverse repo rate in the economy will not change. The RBI is committed to the accommodation approach, which means keeping interest rates low and surpassing system liquidity to support the economy.
The market is looking to reaffirm the accommodation attitude and the RBI is expanding it at any moment. He said the RBI governor had unanimously decided to maintain the accommodation attitude as long as necessary to sustain growth on a sustainable basis and reduce the impact of Kovid-19 on the economy.
This is a strong statement because without doing it for a few months or two quarters, it will last as long as necessary. That is, there will be a helping hand as needed.
Apart from communication on keeping interest rates low, there is another guarantee. The RBI has stated that it will “continue to do whatever it takes to maintain financial stability and prevent domestic financial markets from global spillovers and consequently sustainability.” At uncertain times, there may be volatility in global equity or bond or other markets, which will affect India. There may be an influx of foreign investment. Even within these boundaries, there is a helping hand.
Now, let’s get to a technology. Unions and state governments are running huge deficits in support of the economy and as a result the issuance of government bonds to reduce the deficit is also huge. To support the market, the RBI conducts open market operations (OMOs), a program of government borrowing, to keep interest rates from rising significantly. Under OMO, RBI buys government bonds from banks.
In a recent policy review, the RBI called the secondary market government securities (G-Sec) acquisition program or G-SAP. RBI is committed under G-SAP ₹1 trillion purchases in Q1 FY22. This quantum is high; For a perspective, gross OMO acquisitions, including state government securities, in FY21 ₹3.1 trillion. The RBI governor committed a similar amount in FY22 and could have been more if necessary.
It facilitates the issuance of the latest government securities while keeping interest rates under control. Interest rates on government securities are full, based on which interest rates are charged on other securities. It helps other borrowers such as corporates and non-banking financial institutions.
To look at the forecasts, inflation in Q1FY22 is projected to be 5.2 per cent for the next three quarters, 5.2 per cent, 4.4 per cent and 5.1 per cent, respectively. On average, it stands at 4.95% for the fiscal year. The Consumer Price Index (CPI) should guarantee a projection of about 5% on inflation as there is commodity price inflation, high crude oil prices, etc. Light crop production helps last season and in the next season, the southwest monsoon becomes a crucial variable. Before adding the inflationary impact on growth figures, GDP growth for FY22 is projected to be 10.5%.
Now, apart from supporting the markets and the economy, what does this mean for you and me? If we are able to get a floating rate loan or are looking to get a loan, it is expected that the rates will remain stable due to the support measures discussed above and will not move forward in a hurry.
For your investments in equities and bonds, RBI has raised immunity to the markets. The thing to note is that we are talking about stability, not reduction. The reduction in interest rates ended as real interest rates remained negative for some time.
Inflation in FY21 was 6.6% higher due to supply side issues. It is now moderated and the RBI expects it to be 5% this year, which is a saving grace. However, savers should get a clear positive return on their bank deposits.
Somewhere in the future, the central bank will have to change its neutral stance on accommodation on interest rates. But as of today, the attitude is to support the economy and markets.
Joydeep Sen is a corporate trainer (debt markets) and author.