RBI MPC HIGHLIGHTS: Repo rate unchanged, RBI upgrades GDP forecasts, estimates 7.5% fall this fiscal

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RBI Governor today said that the digital currency is a work in the progress at the central bank. The government is looking to launch a state owned digital currency.

RBI Governor has reiterated that the overall monetary policy stance remains accommodative and that the liquidity for the banking system remains the same.

"While the RBI hiking the inflation forecast is a cause of worry but the projection of growth rate swinging back to positive in Q3, Q4 indicates the worst may be over. The RBI keeping rates low despite high inflation shows its focus to boost economic growth over keeping inflation under check which is majorly a supply-side issue. The RBI policy is supportive of growth and in sync with the government's reform agenda," said Nish Bhatt, Founder & CEO, Millwood Kane International - an investment consulting firm.

Shaktikanta Das stressed on the need for investment by banks and NBFCs towards technology. RBI Govenor added that financial institutuons will need to invest in impriving their systems to stay relevant.

RBI broadly stuck to its October MPC guidance of holding an accommodative stance to support growth. Given a better growth backdrop and sticky inflation, we do not see scope for a material change in policy over next 12 months.

~ Barclays

RBI broadly stuck to its October MPC guidance of holding an accommodative stance to support growth. Given a better growth backdrop and sticky inflation, we do not see scope for a material change in policy over next 12 months.

~ Barclays

"MPC’s pronouncement on continuing the accommodative stance for as long as needed and observation of an improving recovery path will give comfort to markets. The emphasis on ensuring financial stability and maintaining the various liquidity measures also indicate a clear continuity in MPC’s stance. The primary challenge for the monetary policy is coming from elevated consumer price inflation," said Nitin Sharma, Director Research Fidelity International India.

"The unanimous stance by RBI’s monetary policy committee to keep the rates unchanged is prudent at this juncture when the economy is just showing nascent green shoots of recovery but the pandemic-related uncertainty still prevail. Extension of on-tap LTRO to more stressed sectors will continue to support recovery, accruing indirect benefits to the construction sector. Maintaining liquidity at the current levels and further promises of ample market measures to infuse more liquidity in future if needed is a welcome assurance for the financial sector. The inflation forecast has been revised upwards to 6.8% in Q3 and 5.8% in Q4, which is a risk that needs to be closely monitored," said Ravindra Sudhalkar, CEO at Reliance Home Finance.

RBI Governor today said that only when the RBI sees that regulatory action would be best for depositors, only then does the central bank step in.

RBI today said that all the liquidity that it has injected into the market has achieved its target. "All liqudity infusuon, be it mutual fund segment or whether it was to the targeted sectors through TLTRO has met its target," he added.

The Monetary Policy Committee of the RBI beleives that the inflation will soften in the coming months. This will helped by the arrival of the kharif crop and the usual easing of vegetable prices in the winter season.

RBI governor said that the MPC has not junked inflation targetting. "RBI is multipurposing central bank. Inflation targeting is of paramount importance for the RBI but we have a role as a regulator as well," he added.

Inflation caused by supply side disruption and some amount of indirect taxes. We have been cautiously watching it.

~ RBI Deputy Governor

Shaktikanta Das said that the internal working group report on bank ownership is not RBI's view. He added that the central bank has not taken a decision on the report. "The IWG has been working independently," he added. Shaktikanta Das said that the RBI is looking at comments, and then will take a decision.

RBI Governor said that the bank will wait for the financial stability report, which will be out later this month, on shedding light on NPA estimates. He added that the RBI is awaiting Supreme Court's order.

Talking about the two bank bailouts, RBI Govenor said that the RBI's actions are always in the legal framework of law and in the best interest of depositors. 

RBI Deputy Governor today said that there is asymetrical distribution of liquidity. "Out hope is there is mor evening out in rates but we do not wat to intervene," he said.

The RBI today said that it expects India's economy to grow 21.9 per cent to 6.5 per cent in H1:2021-22, with risks broadly balanced. This will be a massive jump from the fall that the GDP will be witnessing this financial year.

“The RBI’s decision to increase the limit from Rs 2000 to Rs 5000 without entering a PIN on contactless transactions through NFC cards is a welcome move. We have in recent months seen a marked increase in contactless transaction on our network. This is because of the fact that the entire transaction is contactless with no one but the cardholder touching the card and also very importantly the ease of use. NFC transactions follow safety protocols as specified by RBI and Payment Schemes and cardholders can be assured that their transactions are being conducted in a secure manner," said Deepak Chandnani, Managing Director, Worldline South Asia and Middle East.

The on tap targeted long term repo operations will be expanded to cover other stressed sectors in synergy with the credit guarantee available under the Emergency Credit Line Guarantee Scheme (ECLGS 2.0) of the Government. This will encourage banks to extend credit support to stressed sectors at lower cost.

~ RBI

"The policy 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 ease further 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," said Lakshmi Iyer, President and Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company.

"The key statement which seems relevant is when RBI Governor repeated that 'All instruments will be used at appropriate time while ensuring ample liquidity is available to the system". Thus we expect that soon some liquidity tightening measures may be introduced in form of term reverse repos of higher tenors or T bills or any other facility to impound liquidity," said Bekxy Kuriakose, Head – Fixed Income, Principal Asset Management.

RBI needs to be more hawkish to tame inflation. The monetary policy committee’s decision to keep key rates unchanged was on expected lines and may continue in the near future to support growth as private consumption has slowly started and several stalled projects have been revived due to the government’s efforts, stated ASSOCHAM and NAREDCO National President, Niranjan Hiranandani. 

"Although increasing inflationary tendencies have been acknowledged, little seems to have been done to contain the price index. In Fact it is assumed that CPI will cool down to below 5% in H1 of FY21-22. In all likelihood, inflation isn’t going lower given the massive helicopter money across the world created by central banks and run up in commodity prices such as crude, base metals. It is likely to remain elevated given that import restrictions are in place to support the domestic economy. Such a growth recipe will have unintended consequences of higher inflation not only in India but across the world which will be the bigger animal to tame a few quarters down the line. However, in the near term this will support recovery in financial markets and will keep the bulls charged in the capital markets," said Jimeet Modi, Founder & CEO Samco Group.

The RBI noted the important role that NBFCs play in the domestic economy. Hence the RBI "decided to put in place transparent criteria as per a matrix of parameters for declaration of dividends by different categories of NBFCs." The central bank said that a draft circular containing the proposed criteria and parameters will be released soon for public comments.

To help banks conserve capital, while creating room for fresh lending, RBI decided that commercial and co-operative banks will retain the profits and not make any dividend pay-out from the profits pertaining to financial year 2019-20.

'Status quo status on policy rates and accommodative stance was broadly on the expected lines. However, commentary remained completely dovish as RBI completely ignored excess liquidity in the system. It looks RBI has factored in upside inflation risk due to excess liquidity scenario by increasing CPI guidance in subsequent period. Notably, MPC remains focused on bolstering economic activities by ensuring continued support to various industries through lower interest rate scenario and on tap targeted LTRO. Further, guidance of 0.1% GDP growth in 3QFY21 and 7.5% GDP contraction in FY21 is encouraging. In our view, depressed real interest rate scenario will continue to prevail in domestic markets, which certainly bodes well for equities,' said Binod Modi- Head Strategy at Reliance Securities.

In a bid to deepen financial markets, the Reserve Bank of India today announced that Regional Rural Banks will be allowed to access the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) of the RBI; and also the Call/Notice money market.

"It was in the expected line with the RBI keeping the rates unchanged and continuing with the accommodative stance. The extension of the accommodative stance to the next financial year has cheered the market. However, the fear of a rising inflation rate is evident in the RBI governor's address. The supply-side issues, demand recovery, and inflow of foreign funds could fuel retail inflation," said Deepthi Mathew, Economist at Geojit Financial Services. 

"The MPC is of the view that inflation is likely to remain elevated, barring transient relief in the winter months from prices of perishables. This constrains monetary policy at the current juncture from using the space available to act in support of growth. At the same time, the signs of recovery are far from being broadbased and are dependent on sustained policy support," RBI Governor said.

"The measures taken by the Reserve Bank over the year gone by have also resulted in a significant moderation in the structure of interest rates across the spectrum, narrowing of risk spreads, and a record issuance of corporate bonds," said RBI Governor Shaktikanta Das.

"The RBI policy announcement 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 Q 4 and H1 FY22," said Joseph Thomas, Head of Research - Emkay Wealth Management on RBI's MPC announcement.

"The RBI keeping key rates unchanged is on expected lines as inflation has been way above the RBI mandated level. The policy stance kept unchanged at Accommodative indicates further rate easing in near future. The announcement by RBI to keep system liquidity in surplus to help growth is a big positive. Low rates and availability of ample funds are necessary for demand in the real estate sector. The result of low rates helped pick up demand in the last few months. The key thing is RBI projecting growth to swing back in the positive territory in Q3 and Q4 of FY21. Positive GDP growth, low rates, easy liquidity, pickup in demand indicates the worst is behind us," said Krish Raveshia, CEO of Azlo Realty.

Shaktikanta Das said that the Reserve Bank of India has turned its focus towards providing further support measures in the interest of growth and maintaince of financial stability. "RBI will persevere with its paramount objective of revising the economy with additional measure in order to enhance liquidity support to targeted sectors, deepen financial markets, conserve capital at banks and NBFC, facilitate external trade by enabline EODB," he added.

The MPC noted that India's exports are charting an uneven recovery path, the prospects have brightened as progress is being made towards a vaccine.

The Central bank said that the fiscal stimulus is moving beyond being supportive of consumption and liquidity to supporting growth generationg investment. 

The RBI expects that the recovery in rural demand will strenthen further while urban demand plays cath-up. Shaktikanta Das said that business sentiment of manufacturing firms is gradually improving.

"RBI has 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 govt borrowings in a year where the revenues are under pressure. Guidance is better than earlier on growth and flows. Positive for markets," said Ashish Shanker, Deputy MD and Head of Investment, Motilal Oswal Private Wealth Management.