Global Economy

Not a lot of room for future rate cuts, says ICRA's Aditi Nayar, on the MPC's projections

ICRA Senior Economist Aditi Nayar breaks down RBI Governor Shakikanta Das’ address in the wake of the Monetary Policy Committee meeting and how the RBI’s plans affect the country.

Tamanna Inamdar: Was GSAP also the big takeaway for you? What were your key points from the RBI Governer’s address?

Aditi Nayar: I think there were three or four important takeaways from the address, first off, the inflation projections, which have been pegged at 5%, and are likely to dictate whether the RBI will look at a rate cut or not. As it stands, there is not much room for them.

Also, there is probably not going to be any early move towards either the repo rate nor the reverse repo being hiked. Keeping in mind the Monetary Policy Committee’s (MPC) projections, the repo rate is going to be on hold through 2021 and the reverse repo rate till the first half of this fiscal year, at least.

Secondly, on the accommodative stance, I thought the language was really important; the fact that there is no explicit timeframe that has been mentioned now as far as the accommodative stance is concerned and that really means that the MPC is going to be data dependent – including COVID-19 case data and vaccinations. The kind of uncertainty that has been reignited in the last few weeks, not only by rising infection rates but also localised lockdowns will only only settle over a period of time – once we have a large part of the population vaccinated – and that’ll only happen over a couple of quarters. Therefore, it is entirely possible that the accommodative stance is here to stay at least for the first half of this fiscal year.

Read More   In Georgia, 11th-hour daggers over voting system

Now, the Government Security Acquisition Programme (GSAP) – of course this is something the markets have welcomed and are in need of. The GSAP will reduce some of the uncertainties created by a large fiscal programme, borrowing programme and inflation rates that are well above the midpoint of the MPC’s target range.

So, what we have now is the committed amount of open market operations (OMO) that the RBI has announced – in terms of what they will be doing in Q1, plus the option of more, if required.

All the data from last week on the government’s fiscal situation points to a couple of things – one, the fiscal deficit of Government of India is likely to have undershot the revised estimates, but that was only a very small cancellation of the last securities auction. In the cash situation, the government has moved into FY22 which is fairly comfortable and this is also something that should help to ease yields and flatten the yield curve line.

Of course, the global factors will remain important – the US Treasuries, commodity prices, particularly crude oil, and inflationary outlook – for us. With all that in mind, we think that the 10-year Gsec yield is likely to be closer to 6.05 to 6.15 rather than the 6.35 that we were fearing for the end of Q1.


Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.