RBI leans towards economic growth, keeps policy rates unchanged at 4%

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The (RBI) on Friday kept its unchanged and promised to continue its accommodative stance this fiscal year and into the next, while sharply revising its inflation forecast upward and retaining its earlier stand that the economy could start recording growth from the third quarter itself.


The repo rate stays at 4 per cent and the stance “accommodative”. The rate pause was on expected lines, and all the six members on the Monetary Policy Committee were unanimous on the matter, RBI Governor said in a post-policy interaction with the media.


Economists and bankers had expected the central bank to remove some of the liquidity overhang that had brought down money market rates way below the policy repo rate. But the central bank did not seem to be in a mood to spoil the party for the bond market, perhaps to manage the Rs 12 trillion borrowing programme by the government.


The central bank will continue to support easy liquidity, Das said.


“The Reserve Bank, on its part, stands ready to undertake further measures as necessary to assure market participants of access to liquidity and easy financing conditions,” Das said.


The central bank will continue to employ instruments such as open market operations (OMO), purchasing secondary market bonds, operation twists, and reverse repos at appropriate times and calibrate them to ensure ample liquidity.


“Our paramount objective is to support growth while ensuring that financial stability is maintained and preserved at all times,” the RBI governor said.


Even as growth is under stress, the central bank has not abandoned its inflation focus, according to the governor.


“Inflation targeting is uppermost on our agenda. There is a reference to it in the preamble of the Act, we give it highest priority.”

The central bank indicated inflation would remain elevated for some time. It raised its inflation expectations for the second half of 2020-21 from 5 per cent to 6.3 per cent. The RBI expects third-quarter inflation to be 6.8 per cent and fourth-quarter 5.8 per cent. Prices of cereals and vegetables are likely to moderate in the period, but those of other food items would remain elevated.


Worryingly, “cost-push pressures continue to impinge on core inflation, which could remain sticky”, the RBI governor said. While exuding hope that the economy will register growth soon, the first quarter’s steep decline would mean the full-year growth number would remain in negative territory.


Rural demand is expected to strengthen, while urban demand is gaining momentum. The government’s fiscal stimulus, the monetary policy statement said, is moving beyond supporting consumption and liquidity to assist growth-generating employment.


Das distanced the RBI from the internal working committee group recommendations on allowing industrial houses banking licences.


The RBI now expects real gross domestic product growth at 0.1 per cent in the third quarter and 0.7 per cent in the fourth quarter, taking full fiscal 2020-21 contraction to 7.5 per cent from 9.5 per cent expected earlier. In the first quarter of the next fiscal year, the RBI suggested growth could be 21.9 per cent (largely because of the base effect as the economy contracted by 23.9 per cent in Q1 2020-21) and overall 6.5 per cent for the first half of 2021-22.


Deutsche Bank Chief Economist Kaushik Das interpreted the monetary policy statements as “end of rate cut cycle”. According to Deutsche Bank, unlike the October policy, the MPC did not mention room for rate cuts, which could be used judiciously.


The RBI has slashed the repo rate by 115 basis points since the nationwide lockdown began in March, and has brought it down by 250 basis points in this cycle, which began in February 2019.


State Bank of India (SBI) Chairman Dinesh Khara said: “The RBI policy of maintaining the status quo was expected but the continued forward guidance of an extended accommodative stance will continue to serve the markets well.”





The rupee closed at 73.80 a dollar from its previous close of 73.93. The benchmark 10-year bond yield dropped 3 basis points to 5.90 per cent.


The central bank also announced some other policy measures. It allowed banks to access on-tap money under targeted long-term repo operations (TLTRO) to lend all the 27 sectors covered under the credit guarantee scheme of the government, with credit outstanding of Rs 50-500 crore. It allowed regional rural banks to access the liquidity window of the central bank for their daily needs.


Importantly, the central bank told banks and cooperative banks not to pay dividends for 2019-20. At the same time, it said non-banking financial companies could formulate their own dividend policies even as they would be subject to scale-based regulatory framework.


In a major development, the RBI allowed an increase of the contactless transaction limit from Rs 2,000 to Rs 5,000 from January 1 next year. The central bank will now enable settlements of all kinds of payments on all days of the year to enhance payment efficiency.


“Enhancements in the payment and settlement mechanisms will help reduce systemic risk and improve customer experience,” said Zarin Daruwala, head of Standard Chartered India.

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