No surprises in RBI Policy as rates and monetary stance stay put

The RBI had already ruled out any policy hikes or change in stance till the growth actually picked up. Hence status quo was the logical option for the MPC.

Feb 05, 2021 02:02 IST India Infoline News Service

This was the most predictable monetary policy in recent times, despite being the last policy announcement of this fiscal. Repo rates at 4% and reverse repo rates at 3.35% are already the lowest in history and any further cuts would have needed a strong justification. The RBI had already ruled out any policy hikes or change in stance till the growth actually picked up. Hence status quo was the logical option for the MPC.
Key highlights of the Monetary Policy – Feb 2021
Here are some of the takeaways from the monetary policy announcement by the MPC.
• The repo rate was held at 4% and the reverse repo rate at 3.35% with no immediate justification for any shift.

• As a result, the pegged rates which are at a spread of 25 basis points above the repo rate viz. the bank rate and the MSF rate also stay put at 4.25%.

• The MPC has also maintained its accommodative monetary stance and committed to keep it accommodative through FY21 and well into FY22 to offset the COVID impact.

• Considering the tapering of food inflation, the MPC has revised its outlook for headline inflation for FY21 to 5.2%.

• The monetary policy committee has upgraded its GDP growth estimates to 10.5% for FY22 in sync with robust performance of agriculture.

• All the 6 members of the MPC unanimously voted to hold the repo rates at 4% and keep the monetary stance accommodative as long as required.

Growth remains the driving factor for monetary policy

If the Sep-20 quarter was a quarter of optimism, Dec-20 was a return to reality for global economies. Several countries across Europe and Asia battled second bouts of the virus and that took some sheen away from the growth stories. However, the IMF has upgraded its outlook for 2020 GDP contraction from -4.4% to -3.5% and hiked its estimates for 2022 GDP growth from 5.2% to 5.5%.

In the Indian context, the first advance estimates pegged the FY21 GDP contraction at -7.7%; close to the Dec-20 policy estimate of -7.5%. The big hope remains the agricultural sector which is expected to sustain 3.5% growth even as high frequency indicators are hinting at revival in manufacturing and services. The MPC has obviously decided to support this revival with a combination of low repo rates and abundant liquidity in the system.

Data Source: RBI Monetary Policy Statement

Real good news could come from inflation
Consensus inflation projection is trending lower and consensus GDP growth outlook is trending higher. Food inflation has plummeted from an average of 9.6% to 3.9% in Dec-20. Robust Kharif output and prospects of a good Rabi, were supported by government’s supply chain interventions. As a result, the inflation outlook has been tempered to 5.2% for March-21 quarter, 5.0% for Sep-21 half year and 4.3% for Dec-21 quarter.

The Economic Survey had underlined the need to shift focus to core inflation rather than headline inflation and that could drive monetary policy going ahead. But, we may have to wait for more details on this front. For now, the decision to keep markets well supplied with liquidity will taper inflation at the short end while weak food prices could taper inflation in the long end.

Going beyond rates and liquidity infusion

Apart from the routine monetary focus, the RBI also announced key policy changes. Here is a quick take on them.

a) The TLTRO on-tap liquidity scheme has been extended to NBFCs also; apart from the stressed sectors identified by the Kamath Committee.

b) CRR, which was cut on account of COVID from 4% to 3%, will be restored to 3.5% of NDTL from 27-Mar and to 4.0% from 22-May. MSF relaxation to continue for 6 months.

c) Banks allowed to deduct loans given to MSMEs from the calculation of NDTL for reserve calculations to encourage banks to lend to MSMEs

d) In view of banking stress, RBI has postponed implementation of Capital Conservation Buffer and Net Stable Funding Ratio by 6 months.

e) Resident Indians to be allowed to remit money to IFSCs under the existing liberalized remittance scheme (LRS) of the RBI.

f) Retail investors to be encouraged to invest in government securities by directly opening accounts with RBI rather than go through aggregators.

g) Foreign Portfolio investors to be permitted to invest in defaulted bonds with exemption from short term limits.

h) A total of 18,000 bank branches across India, still outside the cheque truncation system (CTS), to be integrated by Sep-21.

i) RBI to integrate 3 Ombudsman schemes for banking, NBFCs and digital transactions under a single umbrella for speedy grievance redressal.

Coming just 4 days after an extremely bold budget, the monetary policy has made the right noises. We will have to await detailed minutes on 22-Feb, which could set the tone for the next monetary policy scheduled to be announced on 07-April.

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