RBI MPC votes to keep key rates unchanged, maintains accommodative stance

Mood of the nation has shifted to confidence & hope, says RBI Governor Shaktikanta Das

The Reserve Bank of India Monetary Policy Committee on Friday voted to keep key rates unchanged and maintained an accommodative stance, announced Governor Shaktikanta Das. With this repo rate stays at 4.0 per cent while reverse repo rate stays at 3.35 per cent

The development comes amid signs of recovery in the economy badly battered by the coronavirus pandemic.

"Mood of the nation has shifted to confidence & hope," said Shaktikanta Das adding that the GDP growth may turn positive by Q4FY21. There is an expectation of triple-speed recovery in economic activity, however, real GDP is expected to decline by 9.5 per cent. He said that focus must shift from containment to reviving the economy.

While announcing the policy decision, the RBI Governor Shaktikanta Das said that the RBI will conduct special and outright bond purchases. The size of these special, outright OMOs is to be increased to Rs 20,000 cr.

The accommodative stance would remain “as long as necessary, at least through the current financial year and into the next year to revive growth on a durable basis and mitigate the impact of Covid-19 while ensuring that inflation remains within the target going forward,” Das said in a video livestream on Friday.

The decision was the first under a newly constituted MPC, which includes three external members who have in the past supported monetary and fiscal stimulus to boost the economy. The previous MPC had cut interest rates by 115 basis points this year.

The governor said the central bank stands ready to take further measures on liquidity, and announced a range of steps on Friday:

• Rs 1 trillion of targeted long-term funds with tenors of as much as 3 years from the central bank to banks for investing only in corporate bonds, aimed at easing cash crunch at firms
• RBI had previously allowed banks to hold more government bonds without marking to market. Today, the central bank said it will extend this until March 31, 2022, with conditions
• RBI will buy bonds issued by state governments as a special case. Usually it contains this tool only to federal debt
• Sovereign bonds advanced, with yield on 10-year bonds fell 7 basis points to 5.95 per cent.

Das outlined new forecasts for economic growth and inflation, providing the central bank’s first official assessment of the damaging effect of the pandemic on Asia’s third-largest economy. The RBI sees inflation easing close to 4 per cent in the fiscal fourth-quarter ending March -- the midpoint of its 2 per cent-6 per cent target band. It sees gross domestic product contracting 9.5 per cent in fiscal 2021, but a faster rebound is feasible.

The economy has been slow to recover as the coronavirus continues to spread rapidly in India, home to the second-highest number of virus cases in the world. The Organisation for Economic Co-operation and Development forecasts the economy will shrink 10.2 per cent this year, while Goldman Sachs Group Inc. predicts a 14.8 per cent contraction.

“We suggest that GDP growth may break out of contraction and turn positive by” the fiscal fourth-quarter, Das said.

The central bank will rationalise risk weights for  all new housing loans by March 31, 2022. The RBI will also extend the scheme for co-lending to all NBFCs, HFCs, said the RBI governor.

The RBI also proposes round the clock availability of RTGS from December, 2020, said the governor.

In a Business Standard poll, all the 10 participants, comprising economists and bank treasurers had expected the RBI to pause. 

Most observers said the reason for more rate cuts, at least in this calendar year, has ended for the RBI. The MPC can take a view only after seeing the budget math and the fiscal deficit numbers. Any rate cuts now will also not add much of a value, considering the transmission of the past cuts has not happened.

The announcements made by Governor Shaktikanta Das comes over a week after the MPC meeting was postponed due to delay in the appointment of external MPC members.

Late Monday, the government named Jayanth Varma, professor at the Indian Institute of Management, Ahmedabad; Ashima Goyal, member of the prime minister’s Economic Advisory Council; and Shashanka Bhide, senior advisor at the National Council of Applied Economic Research as external members of the MPC.

The MPC was originally scheduled to meet on September 29, September 30, and October 1, but the new members were not named then. While the new members are domain experts, at the RBI they will get to see more granular data than what is put out for the public. Therefore, economists say, they are unlikely to assert themselves in the first meeting and would like to go with a status quo policy.

The three posts had remained vacant after Pami Dua, Chetan Ghate, and Ravindra Dholakia demitted office on September 22. They had technically left their positions after the August monetary policy meeting, but the government delayed naming their successors.

All eyes were also on the RBI monetary policy — not for any action in terms of a rate cut but for the central bank’s assessment of the GDP growth for the current year. So far, it had refrained from giving any projection. The official reason for this is the uncertainty surrounding the Covid-19 pandemic and its impact on the economy. GDP dived 23.9 per cent in the second quarter from a year earlier making India the worst performance in Asia.