Finance
By: Shree1news, 10 APR 2021
Fitch Solutions has revised its forecast for the Reserve Bank of India (RBI) to maintain its policy repurchase (repo) rate on hold at 4 per cent over the course of FY22 (April 2021 to March 2022) from its prior view for a 25 basis points cut to 3.75 per cent.
This comes on the back of RBI pledging to buy up to ₹1 lakh crore of bonds in Q1 of FY22 to cap borrowing costs and to support the economy’s recovery.
In the meantime, Fitch revised its inflation rate forecast to an average of 5 per cent in FY22, up from 4.6 per cent previously, due to elevated inflationary pressures which underscores expectation for the RBI to keep its policy rate on hold.
The RBI held its policy repo rate at 4 per cent at its monetary policy meeting on April 7. Accordingly, the reverse repo rate was left at 3.35 per cent.
As well as, the RBI announced a secondary market government securities acquisition programme (G-SAP 1.0), committing to buy as much as ₹1 lakh crore worth of government bonds, taking another step towards formalising quantitative easing.
Fitch stated it had initially anticipated another policy fee cut to arrest the rise in government bond yields for the reason that Union Budget announcement in February.
“However, having an explicit bond purchase guidance from RBI following the announcement of G-SAP will also achieve a similar effect, if not even be more effective than a fee cut on capping the increase in bond yields.”
Government bond yields have trended higher for the reason that Union Budget announcement in February, given the government’s substantial market borrowing plan of ₹14.3 lakh crore. To make certain, the RBI had already been buying government bonds within the secondary market, and held ₹3.1 lakh crore worth of bonds in FY21.
However, the announcement of G-SAP marked the primary time the RBI had committed to an explicit quantity of bond buy.
“We believe that this enhances the certainty of bond market on evolution path of bond yields over coming months. This will complement existing open market operations and ‘operation twist’ the central financial institution conducts to cap will increase in bond yields.”
‘Operation twist’ refers to simultaneous purchase of long-end bonds and sale of short-end bonds to cap long-end yields. Following the announcement, government 10-year nominal bond yields fell 12 basis points from the day’s high, indicating that the G-SAP announcement had helped to soothe the nerves of bond market participants.
Fitch stated India has entered a second wave of Covid-19 infections in April despite a broadening vaccination rollout with renewed lockdowns implemented in the hardest-hit state of Maharashtra and separately also Delhi to manage the rising numbers of cases.
Given that these two states account for a combined 17 per cent of GDP, with Maharashtra contributing about 13 per cent, renewed curbs on economic exercise and movement will weigh on the pace of ongoing recovery.
“We expect the ongoing recovery to be driven by private consumption and gross fixed capital formation. However, we have pegged back our forecast for real GDP growth at 9.5 per cent in FY22, putting us below the IMF’s of 12.5 per cent,” stated Fitch.
Source:A-N
