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MPC Minutes: Supporting Growth Remains the Priority Apr 22, 2021 MPC Minutes: Supporting growth remains the priority The RBI’s Monetary Policy Committee released the minutes of its meeting held over Apr 5- 7, 2021. The meeting was followed by central bank’s decision to keep the repo and reverse repo rates unchanged at 4.00% and 3.35%, respectively. Notably, in contrast to the previously held time-based guidance, members shifted to a state-based guidance i.e “continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the 4% +/- 2% target going forward.” The accommodative stance as well as the decision to leave the rates unchanged was unanimous with a 6-0 vote. The MPC meeting was attended by all the members - Dr. Ashima Goyal, Prof. Jayanth Varma and Dr. Shashanka Bhide, Dr. Michael Patra, Dr. Mridul Saggar and was chaired by the RBI Governor Mr. Shaktikanta Das. Key takeaways Inflation: Most members drew comfort on inflation outlook due to bumper Kharif output, strong incoming Rabi harvest arrivals, and increase in imports of certain food products. However, they highlighted that the food inflation trajectory in 2021 will be dependent on the temporal and spatial progress of the SW Monsoon. The MPC also cautioned against increase in international commodity prices, rigidity in domestic fuel taxes and higher input prices due to higher commodity and logistics costs. The MPC reiterated the call for rationalization of excise duties, cesses and state level taxes on petroleum products. Growth: Most members remained cautiously optimistic on FY22 growth prospects with the second COVID wave seen as a near term risk. The MPC retained its FY22 GDP growth projection at 10.5% in the backdrop of the ongoing vaccination drive, fiscal stimulus provided by the Union Budget, increased traction around the PLI scheme and improvement in capacity utilization. Other highlights from MPC members Dr Shashanka Bhide: Highlighting concerns over rising case load, advocated the need for strong policy support for broadening and sustaining positive growth momentum. Going forward, he expects success of vaccination, adoption of preventive measures to limit the chances of virus transmission and investment in health infrastructure to define the course of economic revival. Meanwhile, he expects inflation to remain below 5.3% in all quarters of FY22. However, upside risk to the projected trajectory is expected to emanate from external sector, any deviation from forecasted normal SW monsoon and the overall pattern of domestic economic recovery. Dr. Ashima Goyal: Stated that the above 10% growth which is forecasted by most of the analysts is primarily on account of a favorable statistical base and does not imply sustained potential growth. She expects new investment cycle to build up gradually. In her view, Apr 22, 2021 with easier financing conditions and a healthier financial sector, there is a chance of a credit-led cycle this time leading to rise in investments thereby improving the prospects of potential growth. On the price front, she expects WPI inflation to remain elevated over the next few months on account of surge in infections and a low base effect. She further expects the market volatility to be capped on account of sufficient foreign exchange reserves, which would be beneficial in countering outflows due to surge in UST yields. Prof. Jayanth R Varma: He stated that the principal motivation for the forward guidance was to reduce long term yields in the backdrop of an excessively steep yield curve. According to him forward guidance has failed to flatten the yield curve so far. While flattening of yield curve remains an important goal, he views the same to be pursued using other instruments which largely lie outside the remit of the MPC. Dr. Mridul K. Saggar: Highlighting concerns over India’s growth, stated that baseline projection of 10.5% in FY22 is primarily on the back of an all-time low base. He further added that the realization of the projected growth will translate to a meagre average growth rate of 0.85% in two years following FY20, which rightly justifies the need for the monetary policy’s continued support to growth. In his view, ramping up vaccinations, testing and treatment holds the key to protect economic recovery. Meanwhile, he expects CPI inflation to rise in the near term if producers absorbing large part of cost push pressures decide to pass-through the price hike to retail level. Dr. Michael Patra: Stated that the risks to growth recovery have increased amidst second COVID wave and the inexorably slow pace of vaccinations; moderation in several high frequency sentiment indicators; global risks and spillovers. Meanwhile, he downplayed near term concerns over rising inflation stating that the long term inflation expectation broadly remains stable despite high volatility in food and fuel prices. Nevertheless, he added that he would continue to monitor the recent elevation in inflation and will remain focused on reviving the economy on a path of strong and sustainable growth. Shri Shaktikanta Das: Remaining cautiously optimistic over India’s growth, stated that the progress on vaccination will be key in containing short-term risks to domestic economic recovery and mitigating spillovers from global shocks. On inflation front, he highlighted that a combination of high international commodity prices and logistics costs may push up input price pressures across manufacturing and services. Nevertheless, he expects factors such as bumper food grain production in FY21; mitigation of price pressures through timely supply-side measures on key food items such as pulses and edible oils; and coordinated reduction in taxes on petroleum products by centre and states to help assuage cost pressures on inflation. Our take The unanimous decision of the members to keep interest rates unchanged and to move to a time-based accommodative stance was backed by a significant rise in COVID infections and uncertainty over its economic fallout. While most of the members highlighted concerns and remained vigilant about the impact of full-blown second COVID wave, the members maintained a balanced approach with respect to growth outlook by keeping the full year growth forecast unchanged. However, due to growing risk on the horizon amidst statewide lockdown restrictions, we have revised our GDP growth forecast lower by 50 Apr 22, 2021 bps and are now in line with RBI’s expectation of 10.5% in FY22. Meanwhile, caution on inflation was clear with members highlighting the increasing upside risk due to cost push price pressures amidst increase in global commodity prices. Nevertheless, the MPC expects average inflation in FY22 at 5.0%, remaining within the inflation targeting band of 4% +/- 2%. From monetary policy perspective, our base case is for the RBI to stay on hold in FY22 so as to ensure growth durability. On the liquidity front, members underscored the need for maintaining surplus liquidity conditions with fine calibration to suck out the excess glut by normalizing it whenever possible. In this regard, calibration of liquidity management which commenced with normalization of CRR and 14-day variable reverse rate auction was further supplemented by announcement of variable rate reverse repo (VRRR) auctions of longer maturity (greater than the current 14D). Going forward, we expect continued normalization of liquidity glut in H2 FY22 by reducing the width of the LAF corridor to 25 bps from current level of 65 bps via a gradual hike in reverse repo rate. Apr 22, 2021 BUSINESS ECONOMICS BANKING Radhika Piplani Sanjana Shah Economist Economist [email protected]|+91 22 3372 9016 [email protected]|+91 22 3372 4209 About YES BANK YES BANK is a ‘Full Service Commercial Bank’ providing a complete range of products, services and technology driven digital offerings, catering to Retail, MSME as well as corporate clients. YES BANK operates its Investment banking, Merchant banking & Brokerage businesses through YES SECURITIES and its Mutual Fund business through YES Asset Management (India) Limited, both wholly owned subsidiaries of the Bank. Headquartered in Mumbai, it has a pan-India presence across all 28 states and 8 Union Territories in India including an IBU at GIFT City, and a Representative Office in Abu Dhabi. For more information, please visit the Bank’s website at http://www.yesbank.in/. CORPORATE HEADQUARTERS: ONE International Center, Tower II, 15th Floor, Senapati Bapat Marg, Elphinstone (W), Mumbai 400 013, India. DISCLAIMER In the preparation of the material or information contained in this document, YES Bank Limited (“YES Bank”) has used information that is publicly available, including information developed in-house. Information gathered and material used in this document is believed to have been obtained from reliable sources. However, YES Bank makes no warranty, representation or undertaking whether expressed or implied, with respect that such information is being accurate, complete or up to date, nor does it assume any legal liability, whether direct or indirect or responsibility for the accuracy, completeness or usefulness of any information in this document. The material or information in this document includes external data sources or references to third party, which are outside the realm or control of YES Bank. YES Bank takes no responsibility for the contents of those external data sources or such third party references. No third party will assume and direct or indirect liability, whose references have been provided in this document. It is the responsibility of the user or recipient of this document to make its/his/her own decisions or discretion about the accuracy, currency, reliability and correctness of information found in this document. 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