Monetary Policy Highlights: MPC Keeps Rates Unchanged; Forecasts 9.5% GDP Drop In FY21
A police officer walks past the Reserve Bank of India (RBI) building in Mumbai, India. (Photographer: Kanishka Sonthalia/Bloomberg)

Monetary Policy Highlights: MPC Keeps Rates Unchanged; Forecasts 9.5% GDP Drop In FY21

India’s Monetary Policy Committee kept interest rates unchanged at its latest meeting, as it opted to look through the current high inflation scenario, stressing that its objective remains to revive growth in a durable manner while maintaining inflation within the targeted range of 4 (+/-2)%.

The benchmark repo rate was left unchanged at 4% following a unanimous vote by the reconstituted committee. Earlier this week, the government appointed Ashima Goyal, JR Varma and Shashanka Bhide as external members on the panel.

The reverse repo rate remains unchanged at 3.35%.

The committee maintained an accommodative monetary policy stance, with five out of six members voting to hold that accommodative stance “at least during the current financial year and into the next financial year.” 

The phase of deep contraction is behind us and silver linings are visible, said Governor Shaktikanta Das. Barring a second waive, India stands poised to shrug off the deadly virus and restart its tryst with pre-Covid growth trajectory, Das said, striking an optimistic note.

The MPC judged that while inflation has been above the tolerance band for several months, the underlying factors are essentially supply shocks which should dissipate over the ensuing months as the economy unlocks, supply chains are restored, and activity normalises. Accordingly, they are transient and “can be looked through at this juncture while setting the stance of monetary policy.”

The MPC is of the view that revival of the economy from an unprecedented Covid-19 pandemic assumes the highest priority in the conduct of monetary policy. It will continue with the accommodative stance as long as necessary to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.
MPC Statement 

Also read: RBI Monetary Policy: Growth Concern Overrides Inflation Worry

Growth Forecast

In its first forecast since the Covid crisis began, the RBI said it expects the economy to contract 9.5% in FY21, with risks tilted to the downside.

  • Recovery in the rural economy is expected to strengthen further, while the turnaround in urban demand is likely to lag.
  • Manufacturing firms expect capacity utilisation to recover in Q3 FY21, while contact intensive services will take time to revert to pre-covid levels.
  • Both private investment and exports are likely to be subdued, especially as external demand is still anemic.
Taking into consideration these factors and the uncertain COVID-19 trajectory, real GDP growth in 2020-21 is expected to contract by 9.5%, with risks tilted to the downside. GDP is estimated to contract by -9.8% in Q2 FY21, by -5.6% in Q3, and 0.5% inQ4. Real GDP growth for Q1 FY22 is placed at 20.6%
MPC Statement

Also read: RBI To Allow 24x7 RTGS Payments From December

Inflation Forecast

The RBI also provided its outlook and forecast for consumer price index inflation, which act as the intermediate target in a flexible inflation-targeting framework.

  • Kharif sowing portends well for food prices. Pressures on prices of key vegetables should also ebb by Q3 FY21 with kharif arrivals.
  • Prices of pulses and oilseeds are likely to remain firm due to elevated import duties,
  • while domestic pump prices of petroleum products may remain elevated in the absence of any roll back of taxes.
  • Supply disruptions, including labour shortages and high transportation costs, are getting mitigated by progressive easing of lockdowns
Taking into account these considerations, CPI inflation is projected at 6.8% for Q2 FY21, at 5.4-4.5% for H2 FY21 and 4.3% for Q1 FY22, with risks broadly balanced. 
MPC Statement 

CPI inflation was at 6.69% in August compared to a revised estimate of 6.73% in July, according to data released by the Ministry of Statistics and Programme Implementation. Data for September, due next week, is likely to show that inflation remained above the MPC’s comfort band of 2-6%.

Also read: In A First, RBI To Buy State Government Bonds Via Open Market Operations

Liquidity Measures

The RBI assured markets that it would maintain comfortable liquidity conditions to ensure that the government borrowing program and private borrowing goes through smoothly. The RBI stands ready to conduct market operations needed to keep financial conditions comfortable, said Das.

In particular, the RBI will conduct outright and special open market operations to keep liquidity conditions comfortable. The size of auctions will be increased to Rs 20,000 crore per auction. It will also, for the first time, conduct open market operations in state development loans.

The RBI also announced an on-tap targeted long term repo operations. Rs 1 lakh crore in funds will be available under this facility for a period of three-years. Liquidity availed under this facility should be deployed in corporate bonds, debentures and bank loans to specific sectors, Governor Das said.

The enhanced held-to-maturity limit of 22% of government bonds has been extended till March 2022.

Soothing The Bond Markets

While the first half borrowing program went through relatively smoothly, in recent weeks 10-year government bond auctions devolved as the market seemed to seek higher interest rates.

Governor Das, in a rare comment, said that “financial market stability and the orderly evolution of the yield curve are public goods and both market participants and the RBI have a shared responsibility in this regard.”

Market participants need to take a broader time perspective and display bidding behaviour that reflects “a sensitivity to the signals from the RBI in the conduct of monetary policy and debt management,” Das said.

We look forward to cooperative solutions for the borrowing programme for the second half of the year. It is said that it takes at least two views to make a market, but these views can be competitive without being combative.
Shaktikanta Das, Governor, RBI

Also read: From ‘Combative’ To ‘Cooperative’, RBI Governor Looks To Soothe Market Mood

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