The Reserve Bank of India (RBI) on Friday kept key policy rates unchanged, signalling that the country, barring a second wave of novel coronavirus infections, is poised to “renew its tryst with its pre-Covid growth trajectory”, and that inflation is likely to ease closer to the target of 4 per cent by the fourth quarter of 2020-21.
Governor Shaktikanta Das, after a meeting of RBI’s monetary policy committee (MPC), said there were “some encouraging signs” of a business turnaround, and that economic activity could return to growth in the January-March quarter — even as real GDP is projected to contract by 9.5 per cent for the full fiscal year.
The economy is likely to witness a three-speed recovery, and the MPC has decided to address the more urgent need to revive growth, Das said while unveiling the bi-monthly monetary policy. “The deep contraction of the June quarter of 2020-21 is behind us; silver linings are visible in the flattening of the active (Covid-19) caseload curve across the country,” he said.
Room for cut
The RBI has said a faster and stronger rebound in the economy was “eminently feasible” if the current momentum of upturn gained ground. The decision to keep the policy rate unchanged at 4% implies there is room for further rate cuts.
The newly revamped MPC, headed by Das, said a faster and stronger rebound in the economy was “eminently feasible” if the current momentum of upturn gained ground. The panel, which retained the accommodative stance, said real GDP was likely to grow by 20.6 per cent in the first quarter of 2021-22.
The central bank announced a series of measures to provide more liquidity and keep bond yields under control at a time when central and state governments and corporates are looking to tap the bond market for funds in a big way.
These steps include on-tap Targeted Long Term Repo Operations (TLTRO) of Rs 1,00,000 crore for the revival of specific sectors, and open market operations (OMOs) for state development loans (SDLs) for the first time.
To boost the flow of funds to the real estate and retail segments, the RBI has relaxed the risk weights – the capital required to be set aside – on individual home loans, and raised the loan limit for retail and small business borrowers.
The bank has also decided to make available the RTGS (real time gross settlement) system – online transfer of funds above Rs 2 lakh – round the clock on all days from December 2020. With this, India will be among the few countries globally with a large value payment ecosystem.
The policy panel predictably kept the repo rate (the rate at which the RBI lends to banks) at 4 per cent, and reverse repo rate at 3.35 per cent, and decided to keep the stance at accommodative for the rest of the current financial year and beginning of the next financial year. The panel cut the rate by 40 basis points in the May review, and kept it unchanged in the August policy.
Stating that the Indian economy is entering a decisive phase in the fight against the pandemic, the Governor said: “Relative to pre-Covid levels, several high frequency indicators are pointing to the easing of contractions in various sectors of the economy and the emergence of impulses of growth.” However, the country’s travails were not over yet, and a renewed rise in infections remained a serious threat, he said.
The RBI’s projections indicate that inflation would ease closer to the target by the fourth quarter of 2020-21. In the September 2020 round of the RBI’s survey, households expected inflation to decline modestly over the next three months, indicative of hope that supply chains were getting mended. Retail inflation is projected at 6.8 per cent for the second quarter of 2020-21, 5.4-4.5 per cent for the first six months of 2020-21, and 4.3 per cent for the first quarter of 2021-22, the RBI said.
The policy panel said real GDP growth in 2020-21 was expected to be negative at (-)9.8 per cent in the second quarter of 2020-21 and (-)5.6 per cent in the third quarter, before improving to 0.5 per cent in the fourth quarter.
“Real GDP growth for the first quarter 2021-22 is placed at 20.6 per cent,” the panel said.
According to Das, the MPC has decided to look at the current inflation bump as transient, and address the more urgent need to revive growth and mitigate the impact of the pandemic.
On whether the recovery will be V, U, L, or W shaped, Das said: “More recently, there has also been talk of a K-shaped recovery. In my view, it is likely to predominantly be a three-speed recovery, with individual sectors showing varying paces, depending on sector-specific realities.”
Sectors that “open their accounts” the earliest are expected to be those that have shown resilience in the face of the crisis, and which are also labour-intensive.
The RBI has assured that the borrowing programme of the Centre and states for the rest of 2020-21 will be completed in a non-disruptive manner, without compromising on price and financial stability.
“The RBI will maintain comfortable liquidity conditions and will conduct market operations in the form of outright and special open market operations,” Das said.
At 5.82 per cent, the weighted average cost of borrowings by the central government during the first half of 2020-21 is the lowest in 16 years.
State Bank of India chairman Dinesh Kumar Khara said the RBI’s policy statement was a perfect exposition of doing “whatever it takes” to revive growth.
With growth projections at (-)9.5 per cent and inflation set to be higher at least for now, and with the possibility of a new surge of infections in many countries, the MPC has rightly chosen to keep the policy stance accommodative, relying more on discretion based policy responses rather than being strictly rule-based, Khara said.
After a delay of over a week, the government on Monday appointed Shashanka Bhide, Ashima Goyal, and Jayanth R Varma as independent members of the six-member MPC. The central bank was forced to postpone the bi-monthly MPC meeting scheduled for September 29 and 30, and October 1 as the government failed to nominate its three members to the panel. MPC is the statutory committee that fixes the key policy interest rate and monetary policy stance of the country, as well as the inflation target.
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