Over the last three weeks, the Federal Reserve and the RBI’s Monetary Policy Committee have released updates on the monetary policy. In this month’s Fixed Income note, we’re taking a look at what the commentary is.
Federal Reserve Policy
The federal maintained its stance on the transitory nature of elevated inflation. Indicators of economic activity and employment have strengthened on the back of policy support and vaccinations. Financial conditions are to remain accommodative. The aim to achieve 2% inflation in the long run still stands. The federal funds rate remains at 0% to 0.25% and will remain so until the committee is satisfied with the labour market performance and is confident that inflation is on track to moderately exceed 2%. Substantial progress has been made since December when the committee indicated that it would continue buying Treasury and MBS for $80 billion and $40 billion respectively. If this continues to generate a similar response, the committee has judged that moderation in asset purchases (this is what is known as tapering) may be warranted.
The Federal Reserve has not committed to a timeline for tapering but we can be sure now that it is not a long way off. The next FOMC meeting is on November 3rd. Expect further updates at that point.
RBI MPC
The MPC has expressed that economic activity has been in line with the expectations set during the August meeting. Q1 GDP has been close to expectations and CPI inflation has surprised on the lower side in the months of July to August. Food inflation has eased and monsoon is expected to keep food prices muted. Risks to inflation arise from the increasing prices of commodities and crude in addition to high logistics costs and shortage of industrial components. Rural demand has shown resilience and urban demand is expected to pick up on the back of the festive season. Supportive financial conditions and increasing government CAPEX could bring an upturn in the investment cycle.
The RBI has retained projections for growth.
| Period | Expectation |
| FY 21-22 Q1 | 9.50% |
| FY 21-22 Q2 | 7.90% |
| FY 21-22 Q3 | 6.80% |
| FY 21-22 Q4 | 6.10% |
| FY 22-23 Q1 | 17.20% |
Projections for inflation
| Period | Expectation |
| FY 21-22 Q1 | 5.30% |
| FY 21-22 Q2 | 5.10% |
| FY 21-22 Q3 | 4.50% |
| FY 21-22 Q4 | 5.80% |
| FY 22-23 Q1 | 5.20% |
The RBI also mentioned that EMEs tightening, maintaining or loosening monetary policy is solely based on domestic factors and that Monetary Policy in India will be based on the MPC’s assessment of domestic conditions. It was announced that the Government Securities Acquisition Program (G-SAP) has been successful and the need for undertaking further is unnecessary at the moment.
Total liquidity injection into the system via OMOs in the first half has been at ₹ 2.3 lakh crores vs ₹ 3.1 lakh crores for the full of last year. The 14-day Variable Reverse Repo (VRRR) has been successful. A new calendar was announced for the same:
| Date | Quantum |
| 22nd October | ₹ 4.5L Crore |
| 3rd November | ₹ 5L Crore |
| 18th November | ₹ 5.5L Crore |
| 3rd December | ₹ 6L Crore |
The on-tap SLTRO for Small Finance Banks have been extended till the 31st of December and priority sector lending will be continued till 31st March 2022.
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