Stocks rally on RBI status quo

The BSE Sensex rose 1,016.03 points, or 1.76%, to 58,649.68 and the National Stock Exchange’s Nifty gained 1.71% to 17,469.75.

The monetary policy turned out to be more dovish than expected, according to Deepak Jasani, head of retail research, HDFC Securities. “The committee’s focus is clearly on supporting growth through sufficient liquidity and low interest rates, despite street fears over inflation flare-up, global changes in interest rate policy and high commodity prices. RBI, of course, can fine-tune the surplus liquidity to manage rates depending on the evolving situation,” he said.

RBI left key interest rates unchanged while retaining its accommodative stance. The central bank also maintained its growth and inflation projections.

Experts said RBI’s stance points to a long and gradual road towards policy normalization. “The monetary policy committee’s (MPC’s) priority is to secure growth impulses and preserve policy room to meet this objective, diverging from the global policy shifts, particularly that of the US Federal Reserve. Even as inflation risks were highlighted on imported pressures and volatility in food, ‘flexibility’ in price stability mandate will see the recovery path dictate policy direction. There was little by way of a proposed normalization plan,” said Radhika Rao, senior economist, DBS.

However, Arun Srinivasan, senior executive vice-president of investments at ICICI Prudential Life Insurance Co. Ltd, said while the overall policy is in line with expectations, it was the perfect time for RBI to bite the bullet on the reverse repo hike. “Markets had largely priced in a reverse repo hike in this policy and, therefore, it would have absorbed the move quite smoothly. While RBI’s overarching priority still seems to be reviving growth, in our view, inflation will be the biggest concern,” he added.

There is growing consensus that RBI may have delayed the rate hike due to the Omicron risk, but policy normalization is due next year. Morgan Stanley expects RBI will likely mark the start of policy normalization with a reverse repo rate hike to shrink the policy rate corridor in its next meeting in February. “However, we anticipate the lift-off and its quantum to be contingent on the impact of Omicron on economic activity. If growth momentum remains durable…RBI could choose to hike reverse repo rate 40 basis points (bps) to adjust the policy rate corridor in one shot,” it said.

The bond market’s reaction was limited, with short-term rates largely unchanged, while the 10-year benchmark G-Sec yield was down 2-3 bps to 6.36% in early reaction to RBI’s policy.