RMI MPC Update: Repo Rate Unchanged!

• The  RBI's Monetary Policy Committee (MPC) has kept the repo rate unchanged at 4% in its bi-monthly policy meeting held today. The reverse repo rate too stands unchanged at 3.35%. 
• Repo rate is the rate at which the RBI lends to commercial banks, and reverse repo is the rate at which it borrows from them. 
• The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target going forward. 
• The repo rate has been cut by a total 115 basis points since March 2020 to cushion the shock from the pandemic.

Commentary on Inflation and growth

• RBI said that these decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%; while supporting growth.
• The latest MPC decision came even as CPI inflation fell sharply within the RBI\u2019s tolerance bank of 4.59% in Dec-20, as against 6.93% in November-20. It had stayed stubbornly above 6% in the preceding months since April. 
• Going forward, RBI expects CPI inflation to be 5.2% in Q4 of FY21. The inflation is expected to ease in the second half of FY22 5%- 5.2%.
• This policy decision by the RBI to keep rates unchanged remains in line with our assessment (published last month)  that we are nearing the bottom of a rate cut cycle although policy will remain dovish (low rates) in the medium term.
• In line with the Union Budget, RBI projected a GDP growth rate of 10.5% for FY22. RBI Governor Shaktikanta Das said the growth outlook has improved significantly and the vaccination drive will help the economic rebound.

Additional steps by RBI

• The Reserve Bank of India has allowed banks to extend credit to NBFCs under the targeted long-term repo operations scheme. 
• The central bank has announced the restoration of Cash Reserve Ratio in two phases. CRR refers to a reserve amount that banks park with the RBI on a permanent basis, on which no interest is earned. The CRR will start at 3.5% with effect from March 27 and 4% with effect May 22, 2021. Earlier in Feb 20, the RBI had offered banks exemption from CRR for incremental loans to automobiles, residential housing, and micro, small and medium enterprises (MSMEs) between 31 Jan-31 July 2020, in order to spur credit growth and demand. 
• Retail investors will be allowed to invest in government bonds directly by opening accounts with the RBI. This is being done with the objective of increasing participation by retail investors in the bond markets.

INDMoney Analysis

• The RBI has noted that the signs of recovery have strengthened further since the last meeting of the MPC. High frequency coincident and proximate indicators suggest that the list of normalising sectors is expanding.
• The central bank noted that the Union Budget 2021-22 has provided a strong impetus for revival of sectors such as health and well-being, infrastructure, innovation and research, among others. This will have a cascading multiplier effect going forward, particularly in improving the investment climate and reinvigorating domestic demand, income and employment, it said. 
• The decision to maintain the repo and reverse repo rate by the RBI was in line with street expectations. The recent fall in CPI inflation within the RBI band has lent comfort.  However, there are risks of inflation rising upwards due to demand recovery, as economic growth momentum picks up. 
• Invest in equities in a staggered manner. Keep your SIP\u2019s running. Stick to large caps and index stocks that are best suited to navigate the volatility.
• Stick to AAA-rated low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future but in the medium term (2-3 years) the rate cycle is expected to bottom out and move up.