The investors and the businesses that reposed faith in the underlying solidity and resilience of the Indian economy have come out trumps. The macroeconomic review substantiates that.
That was more on a lighter vein. Coming back to the policy, the Monetary Policy Committee maintained repo rates at 4% and kept the stance accommodative, as long as required. Two factors that may have impelled the MPC to not disrupt the current status quo could be the Evergrande crisis and rising US inflation. This was hardly the time for brave experiments. But, first a quick look at the highlights.
Highlights of the Monetary Policy – October 2021
- The repo rate stays at 4%; reiterating the RBI’s commitment to keep rates low till durable growth returns.
- Contrary to the view in some sections, the MPC chose not to tamper with the reverse repo rate for now and maintained it at 3.35%.
- The bank rate and Marginal Standing Facility (MSF) rate stayed put at 4.25%, since better transmission was doing a good job already.
- The MPC maintained accommodative monetary stance and committed to remain accommodative till there was durable growth visible.
- RBI maintained its GDP growth estimate for FY22 at 9.5% but the good news is that CPI inflation target for FY22 was cut from 5.7% to 5.3%.
- All 6 members of the MPC unanimously voted to hold repo rates at 4% to support the nascent economy recovery.
- While 5 out of the 6 members voted to maintain the accommodative stance of the monetary policy, Jayanth Varma called for a more calibrated commitment.
MPC maintained its GDP target for FY22 at 9.5%. However, the RBI also noted that absolute GDP for the Jun-21 quarter was -9.2% below the comparable 2019 levels. RBI reiterated in its monetary policy that it would not consider rate hikes or shift in accommodative policy stance till durable recovery in GDP growth was visible; over pre-pandemic levels.
In the last 2 years, agriculture provided the boost and services (barring high-contact services) showed good traction. However, manufacturing lagged below 2019 levels. FY22 GDP growth estimates have been held at 9.5%. GDP is estimated to grow 7.9% (Q2), 6.8% (Q3), 6.1% (Q4) and 17.2% (Q1-FY23). The consensus view is that the impact of COVID 2.0 was much better managed, helped by Kharif output and aggressive vaccination program.
Inflation estimates for FY22 cut by 40 bps to 5.3%
If inflation was the X-factor in the last 2 policies, RBI appeared confident that it would be reined in. FY22 inflation estimates have been cut from 5.7% to 5.3% in the October policy. However, this is 20 bps above the June policy estimate of 5.1%. That is an outcome of the sharp spike in crude prices and its strong externalities for the Indian economy.
There are 2 key points made by the MPC. Firstly, the Kharif output may have been hit by delayed rains but overall output is still better than last year. That should temper food inflation and strong government buffer stocks will help. Secondly, improved capacity utilization should bridge the demand-supply gap. Inflation outlook was cut for FY22 to 5.3%. RBI projected inflation at 5.1% in Q2, 4.5% in Q3, 5.8% in Q4 and 5.2% in Q1-FY23.
Development and regulatory measures announced by RBI
RBI governor highlighted in his speech that a number of important announcements are now being made as part of the developmental policy statements. Here is a gist.
a) The on-tap LTRO scheme of Rs10,000cr for small finance banks has been extended from Oct-21 to Dec-21. This has been specifically done to benefit the SFBs which play an important role in last-mile credit delivery.
b) RBI will issue detailed guidelines on allowing digital transaction in offline mode to take care of internet bandwidth disparities. In addition, the RBI has also enhanced the IMPS transfer limit per transaction from Rs2 lakhs to Rs5 lakhs.
c) To provide continued financial access to states and UTs, the enhanced limits of ways and means advances or WMA limits totalling Rs51,560cr has been extended from 30-Sep-2021 till 31-Mar-2022. This should help address temporary liquidity shortfalls.
d) The permission to banks to on-lend priority sector credit through NBFCs for last-mile transactions was scheduled to expire on 30-Sep-2021. That facility has now been extended till 31-Mar-2022.
e) RBI has promised Internal Ombudsman Service for NBFCs on the lines of Ombudsman for banks. This is in the light of the growing credit clout of NBFCs and to empower them to effectively handle and review customer grievances.
There were expectations that the RBI may look at hiking the reverse repo rates as a compromise policy measure. Considering the uncertainty in global markets, specifically Evergrande and US inflation, the MPC has desisted for now. However, the minutes on 22-October will be critical in understanding the arguments on the inflation front. For now, we have to wait till the December policy to be announced on 08-Dec for the next steps.