The Monetary Policy Committee of the Reserve Bank of India will meet on December 6-8 to review the fiscal blueprint. The central bank has so far been maintaining an accommodative stance with rates kept at the lowest level to help the COVID-battered economy rebound and set off on a growth trajectory.
This time, the panel is likely to narrow down the policy corridor between repo and reverse repo by increasing the reverse repo rate, believes Ashutosh Tiwari, Managing Director for Equities at Equirus. “The typical corridor gap is 25 basis points but it is now 65 bps as the RBI had widened it during COVID,” he says in an interview with Moneycontrol.
In the previous policy, the governor had signalled that the fixed rate reverse repo lending is intended to be maintained at Rs 2-3 trillion which is the current level and the rest of the liquidity absorbed through Variable Reverse Repo (VRRR).
“We expect RBI to continue VRRR and bring the reverse repo to 3.75 percent. Citing the new variant, the reverse repo hike can be in two steps, but our expectation is that the RBI will do it at one go,” says Tiwari. Excerpts from the interview:
What is your reading on the Q2FY22 GDP announced on November 30. Have you changed your full year (FY22) estimates for GDP?
The GDP growth was largely in line. The year-on-year comparison won’t be right due to the COVID impact in the base, but if we compare with Q2FY22, GDP was flat. However, if we look at segments, agri and mining have grown 8 percent versus Q2FY22 and utilities by 11 percent. A major decline of 9 percent is there in trade, hotels and transport, which contribute around 16 percent of GDP. This is expected to improve as COVID concerns subside. Credit pick-up from industries is also muted as of now. Overall, we don’t see much change to our FY22 GDP growth forecast and expect 9.6-9.8 percent growth.
The Monetary Policy Committee will meet next week. What are your broad expectations? Do you see more steps on the cards to squeeze liquidity?
The key policy decision expected is the narrowing of the policy corridor between repo (4 percent) and reverse repo (3.35 percent) by increasing the reverse repo rate. The typical corridor gap is 25 bp but it is now 65 bp as the RBI had widened it during COVID. With infusion of liquidity through OMOs (open market operations), the operating rate became reverse repo, rather than repo, and helped to de facto lower the borrowing cost during the pandemic.
In the previous policy, the governor had signalled that the fixed-rate reverse repo lending was intended to be maintained at Rs 2-3 trillion, which is the current level and the rest of the liquidity absorbed through VRRR (Variable Reverse Repo).
The VRRRs are typically funded by the RBI at close to 4 percent. Therefore, we expect the RBI to continue VRRR and bring the reverse repo to 3.75 percent. Citing the new variant, the reverse repo hike can be in two steps, but our expectation is that RBI will do it at one go.
The statement will be ‘continue to remain accommodative’, ‘no change in repo’, ‘liquidity to remain adequate’ to support credit growth.
The economy is faced with the global crisis of semiconductors. And the automobile sector, which contributes 7.1 percent of the GDP and 49 percent of the manufacturing GDP, has seen sales going downhill. Do you think one should bet on the auto sector now?
In autos, while four-wheeler volumes are impacted by chip shortage, in two-wheelers, it’s largely demand weakness from rural India. Weakness in rural demand is primarily due to higher impact of the second COVID wave and consequent impact on rural incomes. Delayed monsoon and unseasonal rain during Navratri damaged crops in North and Eastern India, and also delayed harvesting.
We expect the rural demand to pick up from April as by that time harvesting of rabi crop would also be over and it will coincide with the wedding season demand. Chip availability is gradually improving and volume normalisation in four-wheelers will happen on a month-on-month basis. Considering the valuation of some of the OEMs, especially in two-wheelers, we think it’s the right time to play auto sectors.
What are the big events to watch out for in the coming year? Will these events hit the market sentiment?
The Uttar Pradesh and Punjab elections are two important events in the early part of 2022, outcome of these elections will influence government actions in terms of populist measures or reforms.
Apart from that, we expect a recovery in manufacturing, driven by capex recovery in sectors like metals, chemicals, building materials, renewable power and increasing investment in construction and infrastructure.
Do you expect the market to return to its record high levels before the Union Budget?
Markets might not return to record high levels before the Budget, but we don’t see a significant correction in the markets going ahead, barring sharp resurgence in COVID cases.
The Omicron variant of corornavirus is the latest threat. Do you see a third COVID wave?
With a significant increase in vaccination after the second COVID wave, we do not expect a sharp rise in cases, but with COVID, it’s very difficult to take a call as one never expected even second wave to be so deadly.
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