RBI Monetary Policy: RBI keeps repo rate unchanged at 4%, maintains accommodative stance

Speaking on inflation figures, Das projected CPI inflation at 6.8 per cent in the third quarter (Q3) of the financial year (FY21) and 5.8 per cent in the fourth quarter (Q4) of FY21. Das said that the MPC is of the view that the inflation rate is likely to remain elevated and he expects some relief in the CPI data in the winter months. He said that further steps are necessary to mitigate inflationary pressures.

The RBI governor also said that the central bank is committed to preserve the interest of depositors in the financial system. He said that they have been able to contain human losses, ensure financial systems function normally and reached out to the most vulnerable. The near-time financial losses have been contained, Das said.

“Financial sector entities like banks and NBFCs should give the highest priority to quality of governance, risk management and internal controls,” Shaktikanta Das said in his address.

Speaking on bond markets, the RBI governor said that the corporate bond spreads have narrowed to pre-covid levels. He said that the overall market conditions have evolved in an orderly manner and bond issuances have strengthened for the ones having strong credit ratings. Das also said that the central bank stands ready to undertake further measures as necessary to ensure easy market conditions.

Speaking about the GDP growth, the RBI governor said that the central bank now projects the real GDP growth for FY21 at -7.5 per cent from the -9.5 per cent it projected in their earlier meeting. He said that Q3 growth is seen at 0.1 per cent and Q4 growth is seen at 0.7 per cent.

“H2 is expected to show positive growth. On tap LTRO will be expanded to cover other stressed sectors as well,” Das said.

Speaking about the banks, the central bank boss said that it will allow them to retain profits earned in FY20 and commercial and co-operative banks are allowed to not declare dividends for FY21.

“There will be harmonisation of guidelines for appointments of statutory auditors for banks. External trade will be facilitated by delegating additional power to authorised banks,” Das said.

Speaking about NBFCs, Das said that the RBI will put in place criteria for declaration of dividends and their regulatory regime will be reviewed to take a scale-based approach. He added that the central bank will be releasing a discussion paper on the scale-based supervisory model for NBFCs before Jan 15, 2021.

Speaking about payments and settlement system, the RBI governor said that RTGS will be made 24X7 in the next few days. Also the settlement of AMPS, NFS, Rupay and UPI transactions will be allowed on all days of the week against five days of the week earlier. He also proposed to enhance limits for contactless payments from Rs 2,000 to Rs 5,000 at the discretion of the user from January.

Stock market reaction:

The benchmark indices on BSE and National Stock Exchange (NSE) scaled new highs following the announcement by the RBI governor. The S&P BSE Sensex breached the 45,000-mark for the first time ever to touch 45,023.79, while the broader Nifty 50 touched its fresh high at 13,248.25 during the intraday trade on Friday.

How economists and market experts reacted:

• Deepthi Mathew, Economist at Geojit Financial Services, said: “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.”

• Anuj Puri, Chairman at ANAROCK Property Consultants, said: “It goes without saying that the real estate industry’s perennial hope is fixed on lower interest rates. This would be enabled by reducing the repo rate – a least in theory, given that transmission of reduced repo rates to bank interest rates has been slow at best. With real estate demand gradually returning, especially in the wake of developers’ discounts and freebies and reduced stamp duty charges (in Maharashtra), reduced repo rates would have given an added boost to the ongoing festive season.”

• Bekxy Kuriakose, Head – Fixed Income at Principal Asset Management, said: “RBI Governor in his live appearance once again underscored the success of measures taken since the Pandemic broke out and reiterated that Bond market conditions have evolved in an orderly manner. He assured the market that the various measures being used for stabilizing yields like gilt purchases through OMOs, OT (Operation Twist) etc will continue. The key statement which seems relevant is when he 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. Currently the NET LAF is close to Rs 6 lakh crores and some of this liquidity may be withdrawn.”

• Kaushal Agarwal – Chairman at The Guardians Real Estate Advisory, said: “Owing to inflation concerns and steep reductions previously, the RBI was expected to keep rates unchanged. With commercial banks being asked to consolidate profits and not distribute dividends, it’s time the banks further sweeten the lending rates. With vaccine announcements around the corner and persistent recovery in the economy, the country can be expected to fully recover financially by the end of Q4 FY 20-21.”

• Niranjan Hiranandani, President of ASSOCHAM and NAREDCO, said: “The Reserve Bank of India needs to have a hawkish stance while looking at the inflation figures and try to taper it further in order to mitigate the supply-side pressure. The pro-active stance of the government to tackle the supply side issues would be instrumental in reducing the food prices further. As the numbers show that the economy is recuperating at a quicker pace than anticipated is a very good sign. There are several sectors which are showing an upturn consolidating the fact that the GDP growth numbers would be positive soon. Home loans will continue to remain at attractive rates, this should augur well for home buying sentiment.”

• Joseph Thomas, Head of Research at Emkay Wealth Management, said: “The RBI policy announcement reflects the determination of the central bank to continue with the accommodative policy, with the base rate unchanged at 4 per cent, 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 growth projections too mirror the gradually improving ground conditions, with the overall growth for this year put at -7.50 per cent, with mildly positive growth for Q3 and Q4. The features and contents of the policy gives the reassurance that lower rates and the plenty in liquidity will continue for a longer time period, till the time 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.”

• Adhil Shetty, CEO at BankBazaar, said: “Rising inflation means that the Reserve Bank of India had to maintain the key lending rate at 4.00per cent — unchanged since May 2020. This would mean that deposit and loan interest rates would largely remain flat though banks and lending institutions will continue to calibrate the rates on fresh loans and deposits as per their policies. Lending rates are going through historic lows with around 10 major lenders offering home loans at under 7.00 per cent. From a lending perspective, non-food credit growth accelerated and moved into positive territory for the first time in November 2020 on a financial year basis, implying that banks and NBFCs are beginning to lend more. In contrast, for most of this financial year, lending took a back seat as a significant portion of the large inflow of deposits into the banking system was being deployed to boost SLR investment — holdings that bank must compulsorily maintain in government-backed securities, gold and cash. To give a further boost to lending, the RBI has decided that scheduled commercial banks and cooperative banks shall not make any dividend pay-out from the profits pertaining to FY 21 to help banks conserve capital and strengthen their balance sheets with a view to increase lending.”

• Shishir Baijal, Chairman & Managing Director at Knight Frank India, said: “Today’s announcement remains in line with the RBI’s goal of nurturing growth despite the rise in inflation. Keeping demand stimulated to maintain the current momentum would be critical for continuous acceleration of the economic recovery. Recently reviving market performance indicators, despite all odds and supported by government and central bank interventions, have enthused a great sense of relief across real estate markets in the country. Home loan interest rates, which are at the lowest, have played a key role in rekindling the latent demand in housing market by nudging home buyers to make purchase decisions even during the pandemic. RBI’s decision to keep the rates unchanged will keep the momentum of demand intact to provide the much needed stability , as even while there is recovery in the economy, it is still fragile and highly volatile.”

• Sudhakar Shanbhag, Chief Investment Officer at Kotak Mahindra Life Insurance Company, said: “The MPC has unanimously agreed to hold rates and the accommodative stance to support growth post Covid period while being mindful of the inflation numbers. Since liquidity measures are expected to continue which was one of the worries of the market before policy, yields are expected to remain benign with the steepness of the curve to continue”

• Poonam Tandon, CIO at IndiaFirst Life Insurance Company, said: “In our view, we see the overall policy tone as extremely positive both for equity and debt markets as the focus remains on growth recovery with further commitment to ensure adequate liquidity with a soft interest rate and broadening credit flow to the economy.”

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