The Reserve Bank of India governor Shaktikanta Das on Friday during the Monetary Policy Review announced that the repo rate and reverse repo rate will remain unchanged. “The deep contraction of quarter one is behind us, the silver lining is visible,” said the Governor which announcing the policy-related decisions before the Committee.
“The mood of the nation has shifted from fear to hope” added Das said.
Talking about the recovery status across sectors, the Governor commented that the country is going to witness a three-speed recovery with individual sectors reporting different trajectories.
“Real GDP in 2021 is likely to decline by 9.5 percent but the speedy rebound is anticipated,” added Das.
This was the first meeting of the newly constituted Monetary Policy Committee which includes Ashima Goyal, member of Prime Minister Narendra Modi’s economic advisory council, Shashanka Bhide, a senior advisor at the National Council for Applied Economic Research, Jayanth Varma, a finance and accounting professor at the Indian Institute of Management, Ahmedabad, Michael Patra, deputy governor of RBI, Mridul Saggar, executive director of RBI and governor Shaktikanta Das.
Experts’ reaction on the announcements:
Abheek Barua, Chief Economist, HDFC Bank on the Credit Policy
Today’s monetary policy was as aggressively accommodative as possible without cutting the policy rate. The decision to remain accommodative for an extended period and to look through “transient humps” in inflation reveals an appreciation for the basic principles of economics –that a GDP contraction of 9.5 per cent is simply not compatible with demand-side inflation pressures. If inflation has persisted over the RBI’s target limit, it has been driven by persistent supply-side problems. Persistence itself cannot transform a supply-driven problem to a demand-side concern amenable to monetary policy-driven containment. Given the stance, there is a significant probability of a rate cut in February, if not in December itself as inflation, as we expect, moderates.
The highlight of the policy was the RBI’s signal that it would “do whatever it takes” (a phrase immortalized by former European Central Bank Governor Mario Draghi) to align risk-free government bond yields with the fundamentals of the economy. This involved key changes such as an increase in the size of Open Market Operations and innovations like OMOs in State Government Bonds. Were these measures to succeed, as we expect them to, the upward pressure on yields that have built up on the back of heavily anticipated supply of central and state government bonds, is likely to moderate.
Has the RBI gone overboard in its effort to support growth? We think not. These are unprecedented times and the Indian economy’s revival efforts are hobbled by the lack of adequate fiscal support. If monetary policy does have to do the heavy lifting, it cannot do it within the confines of a conventional “take-no-risks” framework. Conservatives will fret over both inflation and financial stability risks given the combination of a liquidity glut and an effective dilution of prudential norms for things like home loans. We believe it’s a risk worth taking.
Prof. Krupesh Thakkar, CFA, HoD Financial Markets, ITM B-School, Navi Mumbai
RBI, as expected, has kept the short-term interest rates unchanged (Repo rate – 4%; reverse repo and at 3.35% and MSFR at 4.25%). The priority is surely supporting the revival of the economy. The robust rural demand on account of good monsoon will help in recovery. While urban area would take some time owing to partial lockdown resulting in less aggregate demand. On other hand, though CPI has been higher than the threshold limit of 4% (+/- 2%), it is largely owing to supply disruption in food products and cost-push factors in some industries. Nonetheless, it has held the hands of RBI to go for any rate cuts. However, with the situation getting normalise, both the mentioned factors should ease out (robust agricultural crop and more people joining work), which should ideally result in CPI falling to around 4.5% in the last quarter of the current fiscal.
So, this accommodative stance will continue till there is enough evidence of sustainable recovery in the economy. With already large liquidity being evident in the system, the further rate cut will depend on how quickly the inflation is coming down. Otherwise, there seems to be room for a few more bps rate cuts. But let us leave that for the future and see the impact of current measures.
Ankush Kaul, President (Sales & Marketing) – Ambience Group on RBI Monitory Policy
The decision to keep the key policy rates unchanged comes on expected lines. With the economy going through an intermittent phase, the optimism shown by the Apex Bank gives a much-needed solidarity to the industry. The industry in particular, stands to benefit due to the measures taken up so far. We are hopeful that the overall sentiments will improve with upcoming festival season. Moreover, RBI’s stand to rationalize risk weightage on home loans is a step in the right direction. Homebuyers in the affordable, mid-income and upper-middle-income housing segment will benefit immensely from this move.
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