RBI’s Bi-Monthly Review dt. 4th December 2020 – Key Takeaways and Highlights

The Monetary Policy Committee (MPC) of the Reserve Bank met on the 2nd, 3rd and 4th December 2020 and the Monetary Policy was announced on Friday, the 4th December 2020. The MPC kept the repo rate unchanged at 4% and maintained accommodative stance.

Following are the highlights of RBI Governor Shaktikanta Das' statement and resolution of the Monetary Policy Committee (MPC):

* Benchmark rate kept unchanged for third time in a row at 4 pc
* Indian economy expected to contract 7.5 pc this fiscal, lower than 9.5 pc contraction projected in Oct
* Economy to clock growth of 0.1 pc in Q3; Q4 to see 0.7 pc growth
* Retail inflation projected at 6.8 pc in Q3, 5.8 pc in Q4
* Inflation to remain elevated, barring transient relief in the winter months
* Fiscal stimulus moving beyond being supportive of consumption and liquidity to supporting growth-generating investment.
* Private investment still slack and capacity utilisation has not fully recovered
* RBI to use various instruments at appropriate time to ensure ample liquidity is available in system
* RBI ready to take further measures to ease liquidity; will continue to respond to global uncertainty
* RBI to maintain accommodative monetary policy stance to support growth, keep inflation at targeted level
* To raise limit for contactless card transaction from Rs 2,000 to Rs 5,000 per transaction from January
* RTGS system to be made 24X7 in next few days
* Commercial, cooperative banks to retain profit made in 2019-20; not to make any dividend payment
* RBI committed to preserving depositors' interest in the financial system. 

Key takeaways from RBI monetary policy outcome:

Juggling act: The MPC noted that supply chain disruptions are fueling inflation. At the same time, the signs of recovery are far from being broad-based and are dependent on sustained policy support. The MPC has taken extra care to make the policy sounds as a growth supportive one. That is a clear signal to the markets that there is a possibility of more growth-supportive measures going ahead.

“Accordingly, the MPC decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis,” Das said in his statement.

Call for better risk management: In the light of the collapse of two commercial banks in 2020--YES Bank and Lakshmi Vilas Bank--Das reiterated that financial sector entities like banks and NBFCs should give highest priority to quality of governance, risk management and internal controls. "They are the first line of defence in matters relating to financial sector stability,” he said.

Govt cost of borrowing lowest in 16 years: Thanks to a number of Operation Twists and targeted LTROs, RBI has managed to keep bond yields in check even as borrowings swelled to record levels. “The weighted borrowing cost for the Centre stands at a new low of 5.82 per cent as on December 1, even with additional borrowings for state governments as against 6.88 per cent during the corresponding period of last year,” said Das.

Inflation outlook raised: The RBI was forced to raise its inflation outlook as heightened food prices pushed CPI inflation sharply to 7.3 per cent in September and further to 7.6 per cent in October 2020. The committee believes cereal prices may continue to soften with bumper kharif harvest arrivals and vegetable prices may ease with the winter crop. Other food prices are likely to persist at elevated levels.

“The outlook for inflation has turned adverse relative to expectations in the last two months. Taking into consideration all these factors, CPI inflation is projected at 6.8 per cent for Q3, 5.8 per cent for Q4; and 5.2 to 4.6 per cent in H1FY22, with risks broadly balanced,” the MPC said.

Rural demand key for recovery: RBI believes rural demand, which is already a silver lining in times of crisis, is expected to strengthen further, while urban demand is also gaining momentum. While fiscal stimulus and high liquidity have been conducive in easing pressure on the economy, private investment is still slack and capacity utilisation has not fully recovered. The RBI governor said the rural economy looks resilient. "Government borrowings have been smooth so far and corporate bond spreads have narrowed to pre-pandemic levels. RBI's role as debt manager and banker to the government was tested to the hilt. Nascent signs of recovery are visible in H2FY21," he said.
He underscored that the signs of recovery are far from being broad-based and dependent on sustained policy support. A small window is available for proactive supply management strategies.

Thus, RBI has revised real GDP growth at -7.5 per cent in 2020-21. What is important is the central bank sees no more contraction in the economy from the current quarter onwards.

A close eye on financial stability: The RBI governor reiterated that the central bank is keeping a close eye on the financial system of the country. "Near-term financial stability risks have been contained. Portfolio flows into emerging markets have recovered. RBI seeks to quickly recoup employment and output losses. We remain strongly committed to preserving the stability of the financial sector," said Das.

Assures ample liquidity: Governor Das highlighted that the bond markets have evolved in an orderly manner, congenial conditions for other segments of financial markets that price financial instruments of G-Sec yield curve have emerged. He pointed out that the bond market conditions evolved in an orderly manner overall. RBI is ready to undertake further measures to assume market access to liquidity.

"RBI is taking measures to reduce volatility, we will continue to respond to global spillovers to secure domestic stability with our liquidity management operations. We will use various instruments appropriately to ensure ample liquidity," he said. The governor said RBI will continue to respond to global spillovers with our liquidity management tools.

NBFC regulatory regime to be reviewed: Governor Das said for NBFCs, RBI will put in place criteria for declaration of dividends and their regulatory regime will be reviewed to take a scale-based approach. "The current regulatory regime of NBFC sector warrants a review," he said.

"For the overall financial sector, the RBI will introduce risk-based internal audits in large urban co-operative banks and NBFCs. The RBI will also issue 'Digital Payments Security Control Directions'. We will also form a comprehensive mechanism for complaints against lenders," he said.

More sectors under On-tap TLTRO: RBI decided to include more sectors in the scheme that was announced after the last policy meet in order to build synergy with the government’s emergency credit guarantee scheme. This will encourage banks to extend credit support to more stressed sectors at lower cost, fueling growth.

Banks barred from paying dividend: The central bank extended the time period during which banks have been barred from announcing dividends, which will leave them with more capital for lending and contingencies.

RTGS to be 24X7: After NEFT, RBI said it will make RTGS facility, used to transfer large amounts, 24x7 soon. This will make the payment ecosystem more efficient.

Contactless payment limit to be raised: RBI proposed to enhance, at the discretion of the user, the limits for contactless card transactions and e-mandates for recurring transactions through cards (and UPI) from Rs 2,000 to Rs 5,000 from January 1, 2021.

Unanimous decision: All members of the MPC – Shashanka Bhide, Ashima Goyal, Jayanth R. Varma, Mridul K. Saggar, Michael Debabrata Patra and Shaktikanta Das – unanimously voted for keeping the policy repo rate unchanged, highlighting that everyone is on the same page.

Key Announcements and Opinions on RBI Policy Announcements:-
Non-Policy Announcements

1.  On Tap TLTRO – Extension of Sectors and Synergy with ECLGS 2.0​
*Banks can avail funds from RBI under TLRO to invest in sectors under ECLGS 2.0
* Banks can invest in papers, give loans to stressed sectors covered under ECLGS 2.0

  1. Regional Rural Banks permitted to access LAF window, call money market
  2. Commercial & cooperative banks to not make any dividend pay-out from the profits of FY20
  3. Different categories of NBFCs to be allowed to declare dividend as per a matrix of parameters
  4. Discussion Paper on Scale-based Regulatory Framework for NBFCs by Jan 15, 2021
  5. Risk-Based Internal Audit to be extended to UCBs, NBFCs
  6. Harmonisation of guidelines on appointment of statutory auditors for commercial banks, UCBs and NBFCs


> Repo rate left unchanged at 4%; status quo maintained for the third consecutive policy

> MPC maintains accommodative stance at least during current FY & into the next year

>All MPC members voted unanimously for a status quo, accommodative stance

On Inflation

>CPI inflation projection at 6.8% Q3 FY21, and at 5.8% for Q4 FY21

>CPI inflation seen at 5.2 to 4.6% in H1 FY22, with risks broadly balanced

>MPC of view that inflation is likely to remain elevated, barring transient relief in the winter months

>Monetary policy constrained at the current juncture from using the space available to act in support of growth

>Further efforts necessary to mitigate supply-side driven inflation pressures

On Growth

>Real GDP growth projection for FY21 revised to -7.5% from -9.5% earlier

>GDP growth seen at 0.1% in Q3 FY21 and 0.7% in Q4 FY21

>GDP growth seen at 6.5-21.9% in H1 FY22, with risks broadly balanced

>Signs of recovery far from being broadbased; dependent on sustained policy support

>Recovery in rural demand expected to strengthen further

>Urban demand recovery also gaining momentum

>Positive impulses clouded by a possible rise in infections in some parts of the country

>Private investment still slack and capacity utilisation has not fully recovered

>Prospects have brightened with the progress on the vaccines ​

Perspective by Joseph Thomas, Head of Research - Emkay Wealth Management on RBI's MPC announcement

“The RBI policy announcement reflects the determination of the central bank to continue with the accommodative policy, with the base rate unchanged at 4 %, 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 %, 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.”

Rate sensitive stocks rise post RBI policy announcement: Bank, Realty indices up 1%

Shares of interest-rate sensitive sectors- financials, realty and automobiles, were trading higher on Friday after the RBI MPC kept the repo rate unchanged at 4 percent while maintaining the 'accommodative' stance for this year and the next. The overall sentiment was upbeat after the RBI revised FY21 GDP growth to -7.5 percent from -9.5 percent earlier.

The banking and realty indices rose over 1 percent each post the policy decision while the Nifty Fin Services and Nifty Auto indices were also up 0.8 percent and 0.6 percent, respectively. In comparison, the benchmark Nifty also gained 0.6 percent to hit a new all-time high. Among stocks, major banking names like ICICI Bank, Axis Bank, HDFC Bank, Kotak Bank and SBI were all positive, up between half a percent to 2 percent. Most constituents in the auto index also rose post the policy. M&M, Maruti, Bajaj Auto, Tata Motors, and Hero Moto added 0.5-1 percent each. Realty players also cheered the RBI announcements. Omaxe, Godrej Properties, DLF, Sobha, and Sunteck Realty gained 1.7-5 percent.

Quote on RBI MPC by Jimeet Modi, Founder & CEO Samco Group

"RBI maintained status quo in-line with street expectations and GDP numbers too have been revised upwards. Although increasing inflationary tendencies have been acknowledged, little seems to have been done to contain the price index. In Fact it is assumed that CPI will cool down to below 5% in H1 of FY21-22. In all likelihood, inflation isn’t going lower given the massive helicopter money across the world created by central banks and run up in commodity prices such as crude, base metals. It is likely to remain elevated given that import restrictions are in place to support the domestic economy. Such a growth recipe will have unintended consequences of higher inflation not only in India but across the world which will be the bigger animal to tame a few quarters down the line. However, in the near term this will support recovery in financial markets and will keep the bulls charged in the capital markets."

Sanjay Kumar, CEO & MD, Elior India on RBI Policy:

“The RBI announcement comes in on expected lines and signals the revival in the economy. What will be interesting to observe is the net credit outflow that takes place over this quarter. At the same time, RBI has been a bit benign in terms of monitoring inflation indicating  that it could live with some inflationary pressures  in the coming quarters. We expect that this would be its continued stance going into the budget and now hope for a fiscal stimulus in 2021.”

View on RBI Policy by Ashish Shanker, Deputy MD and Head of Investment, Motilal Oswal Private Wealth Management

“RBI policy was on expected lines. They have prioritised growth over inflation. This is an acknowledgment that inflation drivers seem to be more supply side led. An accommodative liquidity stance will ensure access to liquidity will not be a challenge and the ongoing recovery continues to gather steam. This will help push through govt borrowings in a year where the revenues are under pressure. Guidance is better than earlier on growth and flows. Positive for markets.”

View on RBI Monetary Policy Deepthi Mathew, Economist at Geojit Financial Services
"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"

Markets hit record high post policy announcement

The Sensex hit 45,000 for first time ever after RBI upgraded its GDP forecast for FY21 at -7.5 percent vs -9.5 percent projected earlier. The Sensex rose 370 points higher to 45,002 while the Nifty50 index edged higher to its record levels of 13,240, up 107 points. HDFC Bank, SBI and ICICI Bank contributed the most gains along with UltraTech Cement, which rallied over 5.5 percent higher.

Please click on the following links for: Governor’s Statement, December 4, 2020Monetary Policy Statement, 2020-21 Resolution of the Monetary Policy Committee (MPC) December 2-4, 2020

Source: rbi.org.in, CNBC18, Economic Times, Business Standard & Money Control


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