RBI Monetary Policy Review: No change! Governor Shaktikanta Das led panel retains status quo
RBI Monetary Policy Review: After days of deliberation, the Monetary Policy Committee (MPC) led by Governor Shaktikanta Das decided not to change key policy rates. Repo rate has been retained at 4 pct, says RBI Governor Shaktikanta Das. He added that the accommodative stance will continue till March, 2021. That means rates will not rise till then. Governor Das said, "GDP growth is set to turn positive in Q3 with 0.1 pc expansion, Q4 to see 0.7 pc growth, while FY21 growth is expected at -7.5 pct." After the announcement by Shaktikanta Das, stock markets soared with Sensex going on to even hit an all-time high of 45,000 point mark for the first time ever.
The challenge before the RBI-MPC was to strike a balance between increased and continuous requirement of high liquidity, and taming retail inflation. The three-day RBI bi-monthly policy was on since Wednesday. In its preceding policy meet in October, the Reserve Bank had kept the key repo rate unchanged in view of heightened retail inflation which has persistently remained above its comfort level.
Speaking during the credit policy announcement, Governor Das said, "MPC decided to continue with accommodative stands of monetary policy as long as necessary, at least till current financial year and into next year to revive growth on a durable basis and mitigate the impact of COVID-19 while ensuring that inflation remains within target."
Guv Das added, "Monetary Policy Committee (MPC) voted unanimously to keep the policy repo rate unchanged at 4 per cent."
What Shaktikanta Das said:
* In a big concern, Governor Das said that inflation is expected to rise further.
* CPI inflation estimated at 6.8% in Q3 Fy21
* CPI inflation seen at 5.8% in Q4 FY21
* Monetary Policy Committee (MPC) was of the view that inflation is likely to remain elevated with some relief in the winter months from prices of perishables and bumper Kharif arrivals
* Must ensure balance between inflation and growth
* The real GDP growth for 2021 is projected at minus 7.5%. The recovery in rural demand is expected to strengthen further while urban demand is also gaining momentum
* The Marginal Standing Facility (MSF) rate and the bank rate remain unchanged at 4.25%. The reverse repo rate remains unchanged at 3.35%
* Overall bond market condition have evolved in orderly manner
* Governor assures market participants of access to liquidity and easy financing conditions
* RBI to maintain accommodative monetary policy stance to support growth, keep inflation at targeted level
* Committed to preserve depositors' interest in financial system
* Nascent signs of economic recovery in Q2 of current fiscal
* RBI says commercial, cooperative banks to retain profit made in 2019-20; not to make any dividend payment.
* Economy recuperating faster with more sectors joining recovery path
* Will use various instruments at appropriate time to ensure ample liquidity is available in system
* RBI ready to take further measures to ease liquidity; will continue to respond to global uncertainty
Reactions to Credit Policy Announcement
LAKSHMI IYER, CHIEF INVESTMENT OFFICER (DEBT), KOTAK MAHINDRA AMC, MUMBAI
"The RBI has maintained status quo on rates in line with expectation. It continues to maintain its accommodative stance well into the next financial year as well. We view this move as a positive step towards anchoring bond yields and expect yields to ease from current levels.
While inflation guidance has been increased, there seems to be no urgency to withdraw liquidity prematurely as growth considerations remain equally strong."
JOSEPH THOMAS, HEAD OF RESEARCH - EMKAY WEALTH MANAGEMENT, MUMBAI
"The RBI policy reflects the determination of the central bank to continue with the accommodative policy, with the base rate unchanged at 4%, while being cautious about the inflationary pressures that are building up.
"But growth gets the priority once again, with inflation projected to be lower in Q4 and H1 FY22. That all the liquidity measures initiated earlier will continue to be in force is a consolation, especially in a high inflation scenario.
"The features and contents of the policy give the reassurance that lower rates and the plenty in liquidity will continue for a longer time, until inflation rises so much as to derail it. The policy is supportive of both equity and fixed income markets, with its moderating implications for rates."
GARIMA KAPOOR, ECONOMIST - INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI
"The RBI sought to assure financial markets about its continued support to growth through unconventional liquidity measures to prevent any derailment of the momentum, even as elevated inflation capped its wings with respect to rate cuts. The upward revision to growth for FY21 at -7.5% is in sync with our own expectation of -7%.
"We believe that improving signs of growth normalisation and elevated inflation in the near term suggest no additional scope for rate cuts. We expect the repo rate to remain unchanged at least through the first half of CY21."
RADHIKA RAO, ECONOMIST, DBS BANK, SINGAPORE
"Inflation and growth projections were dialled up - to capture the evolving firm inflation trajectory, CPI inflation was revised ~1.5% higher, besides a 2% upgrade in growth forecasts, expecting the headline to turn positive from the December quarter.
"These forecasts cement our expectations that the central bank MPC would prefer to settle into a long pause on rates, with a clear intention to anchor policy expectations.
"Bond market support would be maintained through open market operations as well as liquidity-neutral operation twists. Concurrently, to scale back additional liquidity boost from persistent FX intervention, we suspect the central bank might incrementally ease its bearish grip on the rupee in the coming weeks."
ASHISH SHANKER, DEPUTY MD AND HEAD OF INVESTMENT, MOTILAL OSWAL PRIVATE WEALTH MANAGEMENT, MUMBAI
"The RBI policy was on expected lines. They have prioritised growth over inflation. This is an acknowledgment that inflation drivers seem to be more supply-side led.
"An accommodative liquidity stance will ensure access to liquidity will not be a challenge and the ongoing recovery continues to gather steam. This will help push through government borrowings in a year when revenues are under pressure.
"Guidance is better than earlier on growth and flows."
Before the announcement, there was widespread unanimity on the RBI MPC keeping the rates steady. The Reserve Bank of India's (RBI) key focus in the ongoing policy review meeting was on "ensuring adequate liquidity" in the system while maintaining an "accommodative" stance, industry body Assocham had said.
It also said that the accommodative stance would reflect the RBI's commitment to keep the lending rates benign to support growth, hit by the COVID-19 pandemic.
"Focus of the bi-monthly review of the credit policy by the RBI monetary policy committee is expected to be ensuring adequate liquidity into the system, retaining the policy stance as accommodative," Assocham had said.
The RBI has done a commendable job in handling the situation arising out of the pandemic, it said. It has reached out to a number of sectors like mutual funds, realty, NBFCs and MSMEs, besides the all-encompassing moratorium on loan repayments, Assocham Secretary General Deepak Sood said in a statement.
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At the same time, the financial stability and the bank balance sheets have been strengthened, he added.
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