Fitch Solutions sees RBI holding interest rates through FY-22

New Delhi, Apr 09 (PTI): Fitch Solutions sees RBI keeping benchmark interest rates unchanged during the fiscal to March 2022 following its decision to buy Rs 1 lakh crore of government bonds.
“We had initially expected another policy rate cut to arrest the rise in government bond yields since the Union Budget announcement in February.
“However, having an explicit bond purchase guidance from the RBI following the announcement of the G-SAP will also achieve a similar effect, if not even be more effective than a rate cut on capping the increase in bond yields,” it said in a note.
The Reserve Bank of India (RBI) held its policy repurchase (repo) rate unchanged at 4 per cent at its monetary policy meeting on April 7.
In addition, the RBI announced a secondary market government securities acquisition programme (G-SAP 1.0), committing to buy up to Rs 1 lakh crore worth of government bonds in April-June, taking another step towards formalising quantitative easing.
“As such, we at Fitch Solutions have revised our forecast for the RBI to keep its policy repurchase (repo) rate on hold at 4 per cent over the course of FY22 (April 2021 March 2022), from our view of a 25 basis point cut previously,” it said.
Fitch Solutions also revised its inflation rate forecast to an average of 5 per cent in FY22, up from 4.6 per cent previously, due to elevated inflationary pressures.
The elevated inflation “underscores our expectation for the RBI to keep its policy rate on hold”, it said.
Government bond yields have trended higher since the Union Budget announcement in February, given the government’s substantial market borrowing plan of Rs 14.3 lakh crore.
The RBI had already been buying government bonds in the secondary market and held Rs 3.1 lakh crore worth of bonds in FY21.
“However, the announcement of the G-SAP marked the first time the RBI had committed to an explicit quantity of bond purchase and we believe that this enhances the certainty of the bond market on the evolution path of bond yields over the coming months.
“This will complement the existing open market operations and the ‘Operation Twist’ the central bank conducts to cap increases in bond yields,” it said.