Unexpected Dissent At RBI Decision, Retains Accommodative Bias

The RBI voted to keep rates on hold and retain the accommodative stance. Interest rates are unchanged for a seventh straight meeting, the Bank reiterated the focus remains bringing the economy back on growth path, rather than controlling inflation as fears of a third wave loom large. The surprise of the announcement was that the MPC voted 5-1 to keep rates unchanged, an unexpected dissent.

• Das was largely upbeat about the economy, acknowledging the recovery was fragile but said consumption should pick up with vaccinations, he said inflation was a concern but was transitory. The Bank raised its inflation forecast to 5.7% for the current financial year, against 5.1% seen previously and retained its 2022 growth forecast of 9.5%. The 5.7% inflation forecast, while still higher than previous, is below the 6% upper band and so gives Das some room to be accommodative.
• Yields rose in the immediate aftermath of the announcement despite the dovish tone, potentially factoring in a dissenter at the meeting or possibly some scepticism over the transitory inflation narrative. The rupee weakened, giving back all gains from a higher open. USD/INR last at 74.1515 while equity markets are higher.
• Addressing the bond market the RBI said it would conduct fortnightly variable reverse rate repos (VRRR) for INR 2.5tn. The rate would be incrementally higher at the VRRR's, but Das said this should not be read as withdrawal of accommodation. The RBI will also conduct two more operations under GSAP 2.0.