RBI’s policy stance could bring cheer to investors
The Reserve Bank of India kept the repo rate unchanged and lowered its growth forecast for 2021-22 to 9.5 per cent. But a more detailed analysis shows it has taken several steps to boost industry, provide a fillip to consumption demand and kick-start India’s growth engine.
Investors in the India story have reason to cheer. In its monetary policy on June 4, The Reserve Bank of India (RBI) announced several measures to maintain and boost consumption demand in India’s Covid-impacted economy by providing additional support to sectors that provide livelihoods to hundreds of millions of people.
RBI Governor Shaktikanta Das said: “Unlike the first wave of Covid-19, where economy came to a standstill, economic impact during the second wave will be contained.”
The impact of Covid on urban demand and the spread of the pandemic to rural areas were a significant downside risk to the economy. To mitigate this and to boost consumption in the economy, the RBI made a provision for extending $2 billion in loans to micro, medium and small enterprises (MSMEs) as well as contact-intensive service sectors. These loans will be advanced at the prevailing repo rate, currently at 4 per cent, have tenor of three years and can be availed up to March 2022.
Labour-intensive sectors to benefit
This measure will help labour intensive sectors such as hotels, tour operators, saloons, courier services, car rental agencies, clinics, spas and beauty parlours among others as well as small and medium industries, which account for 40 per cent of the total employment in the manufacturing sector.
This should translate into demand for essential and household items as well as some discretionary spending across various industry segments.
Additional funds for MSMEs
The central bank also provided $2.2 billion additional funds to the Small Industries Development Bank of India (SIDBI) for lending to and refinancing loans of MSMEs. This is in addition to the existing provision of $7 billion for this purpose.
Das indicated that the apex bank will carry on with its accommodative stance. The six-member Monetary Policy Committee (MPC) chaired by the RBI Governor, kept the repo rate, against which banks benchmark their lending and deposit rates, unchanged at 4 per cent.
The reverse repo rate was also left unchanged at 3.35 per cent. Banks borrow funds from RBI at the repo rate and lend money to it at the reverse repo rate.
Maintaining status quo on policy rates is expected to keep all lending rates soft for now and help industries and also buyers of houses, cars and consumer durables. Most economists had predicted that RBI would not tinker with the rates at this point.
This will encourage industry to resume its investment cycle once the Covid scare begins to ebb and demand returns to the economy.
Growth forecast scaled down
The central bank’s policy interventions are particularly significant as it has scaled down its growth forecast for the current financial year to 9.5 per cent, compared to 10.5 per cent it had projected earlier.
The MPC revised its inflation outlook slightly higher compared to previous estimates. The RBI has projected retail inflation, as measured by the Consumer Price Index (CPI) at 5.1 per cent in 2021-22. Its quarterly forecasts for inflation are 5.2 per cent in Q1, 5.4 per cent in Q2, 4.7 per cent in Q3 and 5.3 per cent in Q4 versus its earlier estimate of 5.2 per cent for Q1, 5.2 per cent for Q2, 4.4 per cent for Q3 and 5.1 per cent for Q4.
The latest inflation projections, though higher than the previous forecasts, is still within the RBI’s comfort zone of 2-6 per cent. This, Das said, provides authorities with some elbow room for more actions to shore up demand and push for growth.
Tailwinds are gaining momentum
The expectations of a normal monsoon this year – critical for the rural economy, which accounts for about 46 per cent of the country’s GDP – augurs well for the country and should provide some tailwinds to the economy. The falling Covid curve and the rising levels of vaccinations will also help improve sentiments going forward.
In a further bid to spur investment and demand, Das said the central bank will ensure that borrowing costs remain low for the government as well as for industry. To achieve this, it will buy government securities worth $5.7 billion It will also buy government paper through open market operations to infuse more liquidity in the markets.
Containing third wave will be crucial
As the second wave of Covid begins to taper off, these measures will provide confidence to industry and consumers. If the authorities can contain the expected third wave of the pandemic, which is expected to arrive anytime between now and November, these and other measures that are reportedly in the pipeline could provide a second wind to the economic recovery process that again seems to be sputtering after promising to pick up pace at the beginning of the year.
If it does, investors can expect the bull run in the stock markets to continue defying gravity for several more months.