Just last week, the RBI said it beat the crowd with its 10.5% GDP growth estimate for FY22. But now, it has punched the lights out of its own projections.
On Friday, the central bank revised real GDP growth rate downwards to a single-digit 9.5%. The 100 bps vaporisation was solely due to the second Covid-19 wave that's leaving a trail of human misery and tragedy. And the consequent economic scarring has led to Q1 growth being revised downwards to 18.5% as against 26% projected earlier.
The sharp correction is dispiriting and so Governor Shaktikanta Das attempted to motivate us channeling Greek philosopher Epictetus: “The greater the difficulty, the more glory in surmounting it..."
Truth is, a strong recovery that once seemed so close now appears weaker by the second. This wasn't entirely unexpected as RBI had dutifully released a trailer last month hinting of a 'highly uncertain and clouded with downside risks' economic future. Perhaps, this is why markets shrugged the downward revision with Sensex and Nifty remaining flat after the Friday morning announcement.
If RBI's relatively conservative growth forecast holds, FY22 GDP will safely exceed the pre-pandemic level of 4%.
As for inflation, the central bank moderated estimates to 5.1% for FY22 as against the 5.2% projected earlier. According to Das, April inflation at 4.3% gave an elbow room, while food prices may remain obedient thanks to a normal south-west monsoon. That said, trouble's arriving from other quarters with global crude and commodity prices threatening to wreak havoc. Although India's weak demand conditions may temper the pass-through to CPI scale, the Monetary Policy Committee (MPC) is summoning policy support from all corners.
So at its bi-monthly talk-shop, the MPC unanimously decided to keep repo rate unchanged at a 58-year-low of 4%. It's been there for the past twelve months at a stretch. In any case, repo rate long ceased to be RBI's effective policy rate. That position was until now held by reverse repo rate -- at which banks park funds with RBI -- currently at 3.35%. Though both rates have been hovering at multi-year lows for some time now, interest rates are facing pressure from the bond market as traders favour high yields.
Yields go up when demand for bonds slumps. Rising yields in turn leads to rising interest rates. This is irksome to RBI as it trips monetary transmission. So, to firefight bond markets, the central bank is commanding other policy instruments from its arsenal, aka, the yield curve control via the academically comforting G-SAP.
Dubbed as the balance sheet approach to conducting monetary policy, RBI is mopping up 'high-quality assets,' or government bonds and hopes such demand creation will ensure yields stay rooted to the spot. As a bonus, it also ensures comfortable liquidity.
In Q2, G-SAP 2.0 will amount to Rs 1.20 lakh crore, taking the aggregate to Rs 2.20 lakh crore in the first two quarters. For context, RBI's open market operations for full fiscal FY21 stood a little over Rs 3 lakh crore and chances are it'll exceed it this fiscal, as the central bank is bent on ensuring that the expansive government borrowing doesn't spike long-term bond yields.
Das sought an appropriate market response, but the demand is rather dim. Just this week, RBI devolved 5-year bonds as it refused to pay higher yields that traders sought.
Meanwhile, India's forex reserves are at a striking distance of touching $600 billion. RBI's internal estimates confirm it has crossed the level last week, but official word will be out on Friday. The all-time high reserves offer comfort and confidence to counter global spillovers, if any.
Giving strength to bear financial sorrows of the services sector, Das announced a special on-tap liquidity window of Rs 15,000 crore with tenors up to three years at the repo rate. It means, banks can offer ultra-cheap loans to contact-intensive sectors like tourism, hotels, beauty parlours. Besides, RBI also opened a special liquidity facility of Rs 16,000 crore to Sidbi to facilitate on-lending to credit-deficient sectors including SMEs and MSMEs, whose exposure thresholds under the resolution framework were increased from Rs 25 crore to Rs 50 crore now.