Mumbai: Following its decision to purchase Rs 1 lakh crore of government bonds, the RBI is expected to hold benchmark interest rates unchanged during the fiscal year ending March 2022, according to Fitch Solutions.
Following its decision to purchase Rs 1 lakh crore of government bonds, the RBI is expected to hold benchmark interest rates unchanged during the fiscal year ending March 2022, according to Fitch Solutions. “We had anticipated another policy rate cut to halt the increase in government bond yields following February’s Union Budget announcement. “However, receiving clear bond buying guidance from the RBI following the announcement of the G-SAP would have a similar, if not even more successful, impact on capping the rise in bond yields than a rate cut,” it said in a statement.
At its monetary policy meeting on April 7, the Reserve Bank of India (RBI) held its policy repurchase (repo) rate at 4%. In addition, the RBI launched a secondary market government securities purchase programme (G-SAP 1.0), promising to buy up to Rs 1 lakh crore in government bonds in April-June, moving a step closer to formalising quantitative easing.
“As a result, we at Fitch Solutions have updated our outlook for the RBI to retain its policy repurchase (repo) rate at 4% for FY22 (April 2021-March 2022), down from our previous estimate of a 25 basis point cut,” it added.
Thanks to rising inflationary pressures, Fitch Solutions revised its inflation rate outlook to an average of 5% in FY22, up from 4.6 percent previously. The high inflation rate “underpins our desire for the RBI to maintain its policy rate on hold,” the bank said.
Despite the government’s significant market funding programme of Rs 14.3 lakh crore, government bond yields have been trending higher since the Union Budget announcement in February. The RBI has been purchasing government bonds in the secondary market and had a total holding of Rs 3.1 lakh crore in FY21.
This will be in addition to the central bank’s current open market operations and ‘Operation Twist,’ which aims to keep bond yields from rising too much,” it added.
To cap long-end yields, ‘Operation Twist’ leads to the simultaneous buying of long-end bonds and the selling of short-end bonds. The monetary policy committee (MPC) has sustained its stance of keeping monetary policy accommodative for as long as it is appropriate to support growth on a long-term basis and continue to alleviate the effect of COVID-19 on the economy, while keeping inflation within the goal range of 4% plus 1.5% or minus 2%.
In terms of economic growth, the RBI anticipates strong urban demand as economic activity returns to normal. It also expects the extended production-linked rewards scheme and increasing capacity utilisation to provide good support to investment demand and exports in FY22, given the high public capital expenditure allocation. For FY22, the central bank has kept its 10.5 percent real GDP growth forecast.
According to Fitch Solutions, persistent headwinds to India’s economic growth would require the RBI to maintain its accommodative monetary policy stance. “Despite a broadening vaccine roll-out, India has entered a second wave of COVID-19 infections in April, with renewed lockdowns introduced in the hardest-hit state of Maharashtra and separately in Delhi to control the increasing numbers of cases.
Given that these two states account for a combined 17 percent of GDP, with Maharashtra accounting for about a third of that, new restrictions on economic activity and travel would stifle India’s ongoing recovery, according to the study. Private consumption and gross fixed capital investment are likely to fuel the ongoing recovery, according to Fitch Solutions. “However, we have lowered our outlook for real GDP growth in FY22 to 9.5 percent, bringing us below the IMF’s (12.5 percent) forecast,” it added.
