View on Monetary Policy - Kotak Mahindra Bank Group

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank:

"Expectedly the RBI maintained status quo, attempting to maintain a fine balance between the risks to GDP and inflation. However, we believe that the increasing risks to inflation especially as the economic activity is picking up pace has prompted the MPC into taking liquidity normalisation measures ahead of our expectations. We expect additional liquidity normalisation measures like overnight VRRR, increased quantum of higher tenure VRRR in the months ahead before expecting a reverse repo rate hike in December."

Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company Limited

"While the MPC has decided to maintain status quo on key policy rates and voted 5-1 in favour of continuing with accommodative stance in this meeting, it has also taken few expected steps towards normalisation of excess system liquidity. A phased increase in the quantum of Variable Rate Reverse Repo operations to INR 4 trillion is one such measure that in our view marks the beginning of a cautious withdrawal of exceptional, post-Covid accommodation. However, with continuing emphasis on orderly evolution of yield curve and ongoing support via GSAP, OMOs and OT, markets are expected to take these measures in to its stride. Going forward, we continue to expect further baby steps towards rate and liquidity normalisation as economy continues to improve."

Suvodeep Rakshit, Vice President & Senior Economist at Kotak Institutional Equities:

"Overall, the policy is as expected on rates and stance. We had raised a possibility of split voting and divergence in members' opinions, the details of which will be further clear in the minutes. While we had expected the liquidity related normalization measures from September/October, the RBI's frontloading of VRRR comes with a staggered approach. Given the reasonable demand for the existing 14-day VRRR, the graded additional quantum is not expected to move the overnight rates, just yet. We, however, see this as the first signal towards calibrating liquidity. Tools like overnight VRR, further increase in quantum of VRRR and allowing non-bank participation in the VRRR could be the measures before the onset of policy normalization. Overall, we view this policy as RBI's signal that it remains watchful on growth while the concerns on inflation has increased. It is unlikely that the RBI will change its stance in the October policy, although the split voting pattern could further increase. We expect the start of policy normalization in the form of hike in reverse repo rate could be around the December policy after risks of further Covid wave fade amidst higher pace of vaccination and visibility of durable growth."

Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund

"The RBI MPC left key rates unchanged - on expected lines. The accommodation bias was maintained too, however with 5-1 (1 member dissenting). The Variable rev repos (VRRR) amt was also graded increased from INR 2 tn to INR 4tn over next 1 month. This policy has embarked on liquidity normalisation as a start point, being mindful of growth drivers as well. We could see the yield curve gradually flatten with shorter end moving up tad faster than longer end. Markets could start pricing in possibilities of rev repo rate hike, though the policy refrained from any such guidance."

Sujata Guhathakurta - President & Business Head, Debt Capital Markets at Kotak Mahinda Bank:

"Balanced Policy with all rates kept unchanged. While Accommodative Stance was maintained, some normalization has started, keeping in mind the higher Inflation readings and huge liquidity of Rs 10 lakh crore plus presently. Increase in VRRR amount by Rs 2 lakh crore, setting an Inflation target of 5.7% versus 5.1% earlier and 5.5% expected by market & divided vote on the accommodative stance disappointed the market. In the short to medium term, the yield curve may flatten and we expect OMO, GSAP, Operation Twist to be used adequately to contain the rise in yields."

Source : Equity Bulls

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