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The Reserve Bank of India (RBI) kept policy rates unchanged on February 10 and decided to continue its accommodative stance in the backdrop of elevated inflation.

The RBI is prioritising growth, Rahul Bajoria, managing director and chief India economist at Barclays India, told Moneycontrol in an interview. The central bank consistently emphasised maintaining an accommodative stance until sustainable growth is secured. Edited excerpts:

What is the message the RBI is giving out on supporting growth?

Since the beginning of the pandemic, the RBI has followed a policy of prioritising growth. The MPC (Monetary Policy Committee) has also consistently emphasised maintaining an accommodative policy stance until growth is secured on a durable/sustainable basis. Clearly, the growth slowdown that the country has endured during the pandemic is unprecedented and would require coordinated support from both monetary and fiscal authorities.

While evaluating the central bank’s measures to support growth, we must also consider all the moves it had undertaken over the last few years. In addition to keeping policy rates at low levels, the RBI has also undertaken significant liquidity infusion, provided subsidised credit to targeted segments, and also provided regulatory forbearance for sectors battered by the pandemic.

Such a growth-supportive stance from the central bank is consistent with our forecast of a short-lived hiking cycle with the terminal rate likely settling at 4.5 percent in the current cycle.

Since there is record borrowing from the bond market, how do you see the impact after the policy?

As governor Shaktikanta Das emphasised in the post-policy press conference, it’s important to appreciate that there is no extra/off-budget borrowing that is being undertaken this year. So, to an extent, the increased government’s fiscal deficit/market borrowing only marks a switch to the government’s account from the PSU side.

Now, as far the government’s borrowing plans this year are concerned, the RBI has reiterated its commitment as the government’s debt manager to ensure the borrowing programme is completed in a smooth and non-disruptive manner. The move to increase limits under the voluntary retention route to Rs 2.5 trillion (Rs 2.5 lakh crore) from Rs 1.5 trillion remains incrementally positive.

How much room does the government have to support economic growth?

We believe that the growth/revenue estimates presented in the budget are on the conservative side. Any upside surprise on revenue, which is very likely given the historical tax buoyancy for direct taxes in our country, could be used to further step up its expenditure. The government has prioritised capital expenditure this year and that remains a key positive due to the high multiplier effect. Further, the extension of Rs 1 trillion in loans to the state governments for capex-linked spending also could provide a boost to infrastructure and growth in the economy.

The budget seems to be highly inflationary. Will it not defeat the goal of boosting economic growth?

We do not agree with the assessment that the budget has anything significant to stoke inflation pressures in the economy. Yes, the fiscal deficit has increased, but as explained earlier, a large part of the increase in headline fiscal deficit remains a switch from off-budget items to on-budget spending.

In fact, fiscal resources were used to reduce inflation pressures in the economy. Be it the tax cuts on motor fuels and duty cuts on imported edible oils, the government has utilised/sacrificed fiscal resources to ensure that retail price pressures remain contained.

Overall, we believe that inflation in India is currently largely driven by imported components and as such, we expect inflation to moderate to 4.5 percent in FY23 from an average of 5.4 percent in FY22. The rise in international commodity prices – especially crude oil – remains a source of key upside risk.

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The Reserve Bank of India's monetary policy committee (RBI MPC) struck a surprisingly dovish chord yet again in this policy, choosing to keep all the key rates unchanged, including the Reverse Repo Rate.

The Repo-Reverse Repo policy corridor had widened since the onset of the pandemic, from the conventional 25 bps to 65 bps, as the RBI gave the much-needed liquidity boost in 2020 to manage financial stability during the pandemic. There was a wide consensus among market participants this time, that given the ongoing liquidity normalization by the RBI, it would hike the reverse repo rate by a modest 15 bps to perhaps even 25 bps. However, the RBI has chosen to stay on the sidelines for now, citing downside risks to the economy from the Omicron wave and therefore focusing more on ensuring a strong and sustainable economic recovery rather than fighting the current inflationary trends.

Also read - RBI’s dovishness delights stock market but risks lurk

On the inflation front, the RBI finds the current high prints of CPI inflation to be more on account of unfavourable base effects rather than any structural trend, and expects the CPI to moderate in the second half of FY 2022-23. What is noticeable is that the RBI, at this point in time, does not seem to be too concerned about the persistent high global oil prices (although it views this as a risk) and is also somewhat disregarding the widespread global concerns around inflation and the consequent rise in global interest rates, with central bankers of developed nations already tightening their belts and starting to raise policy rates.

In the policy statement, the MPC was silent on how the central bank proposes to manage the enhanced government borrowing programme that is going to kick in, starting April, pursuant to the expansionary Union Budget announced earlier this month. Debt markets will be wary about the increased supply in the new financial year, and will want clarity around the extent to which the RBI will support the borrowing through OMOs, G-SAPs, Operation Twist, etc. The RBI has probably put off this discussion for the April policy.

Also read: RBI takes another step towards policy normalisation by restoring liquidity framework

On the liquidity front, the RBI is satisfied that the liquidity injection measures undertaken by it over the past couple of years have achieved the desired objective of maintaining financial stability through the pandemic. While the RBI has already undertaken the Variable Rate Reverse Repo (VRRR) auctions to suck out excess liquidity from the money markets, it is now looking to rebalance liquidity on a dynamic basis. While on the one hand the accommodative stance continues (for now), on the other hand, given the ongoing liquidity surplus (though lower than in 2021), the RBI proposes to restore the pre-pandemic liquidity management framework. Towards this, it will use variable rate repos (VRRs) and variable rate reverse repos (VRRRs) of 14 days as the main liquidity management tools, with intermittent fine-tuning, and limiting the use of the fixed-rate reverse repo and MSF windows. Given this shift, the overnight rates are likely to settle somewhere near the repo rate.

Also read: RBI Monetary Policy | Governor Das’ crypto warning has a message for government

To summarise, the RBI is possibly buying some time before it decides about moving out of its accommodative stance and graduating towards a more directional change in interest rates. The debt markets have reacted positively to the pause in this policy; however, the celebration could be short-lived. The key ponderables in the near-term for the markets would be (a) how the RBI will manage the escalated borrowing in the next year and maintain an orderly yield curve, and (b) the global inflation trends and the Fed aggressive posture on the one hand and a soft and accommodative RBI on the other hand, and the likely impact on foreign debt flows as well as the Rupee. The enhancement of the Voluntary Retention Route limits may give some relief to the g-sec markets, in absence of any firm guidance on inclusion of Indian debt securities in the global bond indices.

The Reserve Bank of India's monetary policy committee (RBI MPC) struck a surprisingly dovish chord yet again in this policy, choosing to keep all the key rates unchanged, including the Reverse Repo Rate.

The Repo-Reverse Repo policy corridor had widened since the onset of the pandemic, from the conventional 25 bps to 65 bps, as the RBI gave the much-needed liquidity boost in 2020 to manage financial stability during the pandemic. There was a wide consensus among market participants this time, that given the ongoing liquidity normalization by the RBI, it would hike the reverse repo rate by a modest 15 bps to perhaps even 25 bps. However, the RBI has chosen to stay on the sidelines for now, citing downside risks to the economy from the Omicron wave and therefore focusing more on ensuring a strong and sustainable economic recovery rather than fighting the current inflationary trends.

Also read - RBI’s dovishness delights stock market but risks lurk

On the inflation front, the RBI finds the current high prints of CPI inflation to be more on account of unfavourable base effects rather than any structural trend, and expects the CPI to moderate in the second half of FY 2022-23. What is noticeable is that the RBI, at this point in time, does not seem to be too concerned about the persistent high global oil prices (although it views this as a risk) and is also somewhat disregarding the widespread global concerns around inflation and the consequent rise in global interest rates, with central bankers of developed nations already tightening their belts and starting to raise policy rates.

In the policy statement, the MPC was silent on how the central bank proposes to manage the enhanced government borrowing programme that is going to kick in, starting April, pursuant to the expansionary Union Budget announced earlier this month. Debt markets will be wary about the increased supply in the new financial year, and will want clarity around the extent to which the RBI will support the borrowing through OMOs, G-SAPs, Operation Twist, etc. The RBI has probably put off this discussion for the April policy.

Also read: RBI takes another step towards policy normalisation by restoring liquidity framework

On the liquidity front, the RBI is satisfied that the liquidity injection measures undertaken by it over the past couple of years have achieved the desired objective of maintaining financial stability through the pandemic. While the RBI has already undertaken the Variable Rate Reverse Repo (VRRR) auctions to suck out excess liquidity from the money markets, it is now looking to rebalance liquidity on a dynamic basis. While on the one hand the accommodative stance continues (for now), on the other hand, given the ongoing liquidity surplus (though lower than in 2021), the RBI proposes to restore the pre-pandemic liquidity management framework. Towards this, it will use variable rate repos (VRRs) and variable rate reverse repos (VRRRs) of 14 days as the main liquidity management tools, with intermittent fine-tuning, and limiting the use of the fixed-rate reverse repo and MSF windows. Given this shift, the overnight rates are likely to settle somewhere near the repo rate.

Also read: RBI Monetary Policy | Governor Das’ crypto warning has a message for government

To summarise, the RBI is possibly buying some time before it decides about moving out of its accommodative stance and graduating towards a more directional change in interest rates. The debt markets have reacted positively to the pause in this policy; however, the celebration could be short-lived. The key ponderables in the near-term for the markets would be (a) how the RBI will manage the escalated borrowing in the next year and maintain an orderly yield curve, and (b) the global inflation trends and the Fed aggressive posture on the one hand and a soft and accommodative RBI on the other hand, and the likely impact on foreign debt flows as well as the Rupee. The enhancement of the Voluntary Retention Route limits may give some relief to the g-sec markets, in absence of any firm guidance on inclusion of Indian debt securities in the global bond indices.

The debt markets were actually prepared for a reverse repo rate hike in this policy, and it was possibly an opportune time to do the “shift”. So was this a missed opportunity?

Reliance Industries' arm Reliance New Energy Limited (RNEL) has entered into an agreement to invest Rs 50.16 crore in Altigreen Propulsion Labs Private Limited (Altigreen), the Mukesh Ambani-led conglomerate said Thursday.

RNEL will buy compulsorily convertible preference shares of the Bengaluru-based company, which Altigreen is an electric vehicle technology and solutions company for commercial last mile transportation through 2-,3-, 4-wheeled vehicles. The transaction is proposed to be completed before March 2022.

“The investment is part of our Company's strategic intent of collaborating with innovative companies in New Energy and New Mobility ecosystems,” RIL said.

RIL did not disclose the stake that it will acquire upon the conversion of the shares in Altigreen.

Altigreen has developed an E3 vehicle and its vehicles are built in-house in Bangalore on a 100% indigenous mobility platform. It currently has presence in 60 countries with 26 global Patents.

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Amid FY23 Union Budget’s focus on investments, leading domestic credit rating agency CRISIL on Wednesday said that the capital expenditure is ”not as high as it sounds”.

It, however, was quick to add that considering that governments usually tend to cut capex during a crisis, the government has maintained its focus on growth-spurring initiatives amid the pandemic.

The research wing of the agency said, if one excludes the Rs 1 lakh crore of loans to states for capex included in the headline figure of Rs 7.50 lakh crore or 2.91 per cent, the actual spend in FY23, will go down to 2.58 per cent of GDP, which is barely at par with the revised estimate of FY22.

The report also pointed out that the overall number showing a rise has been ’offset’ through a reduction in internal and extra budgetary resources (IEBR), which funds capex of central public sector enterprises (CPSEs).

IEBR has been budgeted at 1.82 per cent of GDP for the next fiscal, much lower than the pre-pandemic average (fiscals 2018-20) of 3.33 per cent, it said, attributing the same to poor capex execution by CPSEs lately.

Finance Minister Nirmala Sitharaman is scheduled to address the post-budget meeting of the RBI’s central board on Monday and highlight key points of the Union Budget 2022-23, including the fiscal consolidation roadmap and high capex plan.

It has been a custom that the finance minister addresses the RBI board, consisting of RBI Governor and existing four deputy governors, after the budget.

The meeting has been scheduled for February 14 where she would be addressing the board members and talk about announcements made in the Budget to perk up growth hit by three waves of COVID-19, sources said.

The Budget 2022-23 presented earlier this month estimates a nominal gross domestic product (GDP) growth of 11.1 percent.

The government expects this growth to be fuelled by a massive capital spending programme outlined in the Budget with a view to crowd-in private investment by reinvigorating economic activities and creating

In the upcoming meeting, we expect Monetary Policy Committee (MPC) to build a case for modest and measured policy tightening, in order to keep bond market sentiments in check.

Also read: Life insurers' new premium income up 3% to Rs 21,957 crore in January

This central bank support to government borrowing was a great source of market comfort while it lasted. But for every stimulus sugar rush, there is a bitter tapering pill. The ongoing transition from pandemic to endemic means that excess monetary accommodation is being scaled back. A high level of “not so transitory” inflation is only serving to accelerate this process, as central banks increasingly find themselves falling behind the curve. In other words, monetary policy normalisation is closely following our exit from the pandemic.

On the other hand, the glide path to fiscal consolidation is a relatively slow process. Hence, government borrowings are likely to remain elevated. Absent central bank buying, bond markets will now have to absorb this high supply predominantly on their own. The US Federal Reserve, for instance, is concluding its asset purchase programme by March and has already signalled monetary tightening soon after. The Bank of England has delivered two consecutive rate hikes and the Reserve Bank of Australia has recently put an end to its government bond purchases.

Also read: Cut in funds for welfare schemes; no steps for inflation or job creation: Shashi Tharoor on Budget

ided the necessary emphasis on capital spending, but that has come at the cost of a large borrowing programme for FY23. Even as headline inflation remains within the Reserve Bank of India’s (RBI) target band, inflationary pressures persist as oil inches up towards $100 a barrel and WPI inflation remains in double digits. With policy normalisation already underway, RBI support to bond markets is expected to remain constrained. This has weighed on bond market sentiments. However, the recent sharp rise in bond yields may already have tightened the financial conditions a bit too hastily for RBI’s comfort.

In the upcoming meeting, we expect the monetary policy committee (MPC) to build a case for modest and measured policy tightening in order to keep bond market sentiments in check. We believe the MPC will gradually normalise the repo rate-reverse repo corridor (to 25 bps) over the next two meetings, starting with a 20 bps reverse repo rate hike in February. Subsequently, the MPC will change its accommodative policy stance to neutral, eventually embarking on a gradual rate hike cycle.

Also read: Budget 2022| PSUs are due for upwards re-rating, even with the lower disinvestment target: ICICI Prudential’s S Naren

In our view, MPC guidance on liquidity normalisation may also be equally unhurried, with the introduction of incrementally longer tenor VRRRs (variable reverse repo rate) over a period. Difficult as it may be, going forward, the RBI has to deftly and non-disruptively juggle its conflicting objectives on inflation, liquidity normalisation and management of the government’s borrowing program. Along the way, sometimes the market may remain orderly, but at times it may not.