RBI to support growth, but clear liquidity overhang

by Manasi Swamy

RBI’s Monetary Policy Committee (MPC) decided to keep repo rate unchanged at 4 per cent and reverse repo rate at 3.35 per cent in the fourth bi-monthly monetary policy review for 2021-22. This is for the eighth time in a row that the MPC has maintained status quo on policy rates. The Committee continues to hold its ‘accommodative’ stance and has stated, These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. The decision to maintain the accommodative stance was not unanimous as one of the members Prof. Jayanth R. Varma voted against it. He had voted against the ‘accommodative’ stance in the last monetary policy review too, arguing that the inflation target for MPC is 4 per cent and not 6 per cent or even 5 per cent. He had warned that treating 5 per cent as the target would significantly increase the risk of inflation targeting failures.

The MPC’s recent policy decision was in line with market expectations. The general consensus among economists was that with easing retail inflation, the MPC would retain the key policy rates, and would instead focus on the unconventional measures such as Variable Reverse Repo Rate (VRRR) and government securities acquisition programme (GSAP) to curb excess liquidity in the economy.

The RBI did exactly the same. While the MPC left policy rates unchanged and made its intentions clear of not going for any rate hike in the near future by maintaining the ‘accommodative’ stance, the RBI governor expressed his discomfort about the current liquidity overhang in the market. He mentioned, in his statement, that the potential liquidity overhang amounts to more than Rs.13 trillion. He proposed to undertake 14-day VRRR auctions on a fortnightly basis in the following manner - Rs.4 trillion on 8 October, which has already been notified; Rs.4.5 trillion on 22 October; Rs.5 trillion on 3 November; Rs.5.5 trillion on 8 November; and Rs.6 trillion on 3 December. He added that the RBI may also consider undertaking 28-day VRRR auctions depending upon the evolving liquidity conditions based on the quantum of capital flows, pace of government expenditure and credit offtake. He assured the market that these operations have been announced considering the high appetite in the market. Liquidity absorbed under the fixed rate reverse repo would be around Rs.2-3 trillion in the first week of December 2021.

The governor also declared the RBI’s decision of putting a pause to its G-SAP operations, after having injected liquidity of Rs.2.37 trillion through these in the first half of 2021-22. He added that the RBI would remain flexible in conducting open market operations (OMOs) and operation twist (OT) based on the requirement.

The MPC revised its inflation forecast for 2021-22 downwards to 5.3 per cent in its monetary policy review from 5.5 per cent estimated earlier. While the downward revision is concentrated in the second and the third quarter, the MPC’s guidance on inflation trajectory towards the end of the year remains unchanged. It now projects inflation in the second quarter of 2021-22 at 5.1 per cent, considerably lower than its earlier projection of 5.9 per cent and for the third quarter at 4.5 per cent as compared to its earlier projection of 5.3 per cent. The MPC has left its inflation projection for the fourth quarter unchanged at 5.8 per cent which means that inflation would edge just below the upper limit of its inflation tolerance band towards the end of the year.

The MPC believes that food prices would remain soft on good kharif and rabi crops and positive effects of measures taken by the centre to improve availability of supplies of pulses. It acknowledges that input cost pressures are building up because of rising metal and energy prices, acute shortage of key industrial components and rising logistics costs, but it also expects the pass through at the consumer level to be weak because of subdued demand. The MPC remains concerned about high edible oil prices and volatile trend in global crude oil prices.

The MPC’s commentary on the domestic growth in its recent policy review appeared more positive than the last one. It stated that economic activities had started regaining momentum in August-September 2021 with a fall in new Covid-19 infections, acceleration in vaccinations and easing of restrictions. The MPC quoted data on PMI, railway freight traffic, cement production, electricity demand, port cargo, e-way bills, GST and toll collections in support of this argument. It added that consumer confidence was reviving, capacity utilisation and business outlook were improving and monetary as well as financial conditions were supportive to growth. The MPC also sounded bullish on the prospects of both, kharif and rabi crops this year. It, therefore, scaled up its GDP growth forecast for the second quarter of 2021-22 to 7.9 per cent from 7.3 per cent projected earlier and for the third quarter to 6.8 per cent from 6.3 per cent, while leaving the projection for the last quarter unchanged at 6.1 per cent. The Indian economy had performed better than the RBI’s expectation in the first quarter. Hence, the MPC’s growth projection for the full fiscal year 2021-22 remains unchanged at 9.5 per cent even after these quarterly revisions.

On the flip side, the MPC re-iterated its fears regarding elevated commodity prices, high input costs, potential global financial market volatility and uncertainties pertaining to Covid-19 weighing on not only inflation, but also domestic growth.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
8.3 +0.7
Consumer Sentiments Index
Base September-December 2015
81.9 -0.2
Consumer Expectations Index
Base September-December 2015
81.6 0.0
Current Economic Conditions Index
Base September-December 2015
82.3 -0.6
Quarterly CapEx Aggregates
(Rs.trillion) Dec 21 Mar 22 Jun 22 Sep 22
New projects 4.04 8.60 4.88 3.53
Completed projects 2.86 1.32 1.18 1.33
Stalled projects 0.08 0.43 0.53 0.06
Revived projects 1.98 0.33 0.29 0.09
Implementation stalled projects 0.66 0.09 0.29 0.26
Updated on: 08 Dec 2022 8:28PM
Quarterly Financials of Listed Companies
(% change) Dec 21 Mar 22 Jun 22 Sep 22
All listed Companies
 Income 23.4 20.8 40.1 25.1
 Expenses 21.3 19.8 41.4 27.1
 Net profit 35.4 31.3 21.1 -3.0
 PAT margin (%) 9.0 8.8 7.2 7.7
 Count of Cos. 4,756 4,671 4,683 4,494
Non-financial Companies
 Income 29.3 24.8 50.1 27.8
 Expenses 28.8 25.7 52.9 31.5
 Net profit 19.2 9.8 8.3 -22.6
 PAT margin (%) 7.5 7.6 5.7 5.5
 Net fixed assets 2.0 3.9
 Current assets 15.0 19.3
 Current liabilities 11.7 10.8
 Borrowings 3.6 11.8
 Reserves & surplus 11.3 7.6
 Count of Cos. 3,439 3,387 3,414 3,330
Numbers are net of P&E
Updated on: 08 Dec 2022 8:28PM
Annual Financials of All Companies
(% change) FY20 FY21 FY22
All Companies
 Income 0.6 -0.9 25.8
 Expenses 0.4 -3.2 24.7
 Net profit -3.8 75.0 61.6
 PAT margin (%) 2.0 4.3 7.9
 Assets 9.0 9.9 9.9
 Net worth 4.7 12.0 14.2
 RONW (%) 3.4 6.8 11.8
 Count of Cos. 33,421 32,202 9,171
Non-financial Companies
 Income -1.1 -1.9 31.7
 Expenses -0.9 -3.9 31.5
 Net profit -20.4 62.2 60.2
 PAT margin (%) 2.2 3.9 6.9
 Net fixed assets 11.3 2.2 2.3
 Net worth 2.1 10.5 14.8
 RONW (%) 4.6 7.5 13.3
 Debt / Equity (times) 1.2 1.0 0.7
 Interest cover (times) 1.9 2.4 4.3
 Net working capital cycle (days) 82 88 55
 Count of Cos. 26,380 25,257 6,870
Numbers are net of P&E
Updated on: 05 Dec 2022 10:11AM