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December 04, 2020 / 04:03 PM IST

RBI Monetary Policy Highlights | Banks, NBFCs need to invest in robust IT systems, Governor Shaktikanta Das

RBI Policy LIVE Updates: Reserve Bank of India's Monetary Policy Committee (MPC) has kept repo rate unchanged at 4%, reverse repo maintained at 3.35% and also maintained "Accomodative" stance


Monetary Policy LIVE Updates: The Monetary Policy Committee (MPC) on December 4 decided to keep interest rates unchanged. It has maintained the policy stance at "accommodative", amid high inflation and some signs of economic recovery. The MPC made a unanimous decision to keep the repo rate steady at 4 percent, Reserve Bank of India (RBI) Governor Shaktikanta Das said. The reverse

repo rate also remains steady at 3.35 percent. Das said the MPC will maintain the accommodative stance "for as long as necessary." Meanwhile, Real Gross Domestic Product (GDP) is projected to contract 7.5 percent in 2020-21, as against an earlier estimate of a contraction of 9.5 percent. And Consumer Price Index (CPI) inflation is forecast at 6.3 percent in Q3FY21, and 5.8 percent in Q4. "Inflation is likely to remain elevated. Signs of recovery are far from being broad-based. A small window available for proactive supply management strategies," the RBI Governor said.

Here are the six key takeaways:

>> Inflation forecast: The RBI governor said inflation is likely to remain elevated with some relief in the winter months. "CPI inflation is seen at 6.8 percent for Q3FY21 and projected CPI inflation is at 5.8 percent for Q4FY21. For H1FY22, projected CPI inflation is seen at 5.2-4.6 percent with risks broadly balanced," said Das.

>> Growth forecast: 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, Das said. "It was hence decided to maintain the status quo in policy rates. The year 2020 has been extremely challenging and our determination to fight and overcome stood out in this difficult year," Das said.

"Projection for H2FY21 is positive +0.1 percent for Q3 against -5.6 percent earlier and +0.7 percent for Q4 against +0.5 percent earlier. Real GDP growth for FY21 projected at -7.5 percent," said Das.

>> 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.

>> RTGS facility to be made 24x7: The money transfer tool RTGS facility will be made 24x7, said, governor Das. "Settlement of AMPS, NFS, Rupay and UPI transactions will be allowed all days of the week against earlier five days of the week," said Das.

Most analysts had expected the monetary policy committee (MPC), which sets the key policy rates in India, to retain the rates this week after the three-day meeting (December 2-4). Inflation and growth are the key factors that decide the course of monetary policy. The rate panel takes a view looking at the growth-inflation dynamics. To put it in simply, higher inflation warrants, typically, a tighter monetary policy (hike in key rates) whereas falling economic growth calls for lower interest rates. The idea is lower rates spur demand and economic activity.
  • December 04, 2020 / 04:01 PM IST

    Is MPC's 'accommodative' stance losing its meaning amid high inflation? 5 key takeaways on RBI’s growth-inflation conundrum
    The monetary policy committee (MPC) has retained the key rates in its policy review amid the pandemic worries. It has voted for growth, ignoring the near-term pressure on inflation. The MPC has largely affirmed the guidance it gave in the October policy—to continue with the ‘accommodative stance’ as long as necessary to support growth. It has opted for status-quo in the last few policies despite being in an ‘accommodative’ stance.
    Now the key question--can the MPC cut rates going ahead (which is what the stance suggests) or shift focus to inflation management that is clearly not the focus now? High inflation prevents the MPC from easing the policy rates no matter what stance it takes. Read here for the five key

  • December 04, 2020 / 03:55 PM IST

    RBI Monetary Policy LIVE | Reactions
    Deepak Chandnani, Managing Director, Worldline South Asia and Middle East:
    "The RBI’s decision to increase the limit from Rs. 2000 to Rs. 5000 without entering a PIN on contactless transactions through NFC cards is a welcome move. We have in recent months seen a marked increase in contactless transaction on our network. This is because of the fact that the entire transaction is contactless with no one but the cardholder touching the card and also very importantly the ease of use. NFC transactions follow safety protocols as specified by RBI and Payment Schemes and cardholders can be assured that their transactions are being conducted in a secure manner.”

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  • December 04, 2020 / 03:52 PM IST

    RBI Monetary Policy LIVE | Reactions
    Prof. Krupesh Thakkar, CFA, HoD Financial Markets, ITM B-School, Navi Mumbai:
    "The RBI has kept the key interest rates unchanged, repo at 4% and reverse repo at 3.35%, for the third straight time. Though, it has kept its accommodative stance, the concern is on rising inflation. This was also evident as CPI for the month of October 2020 came at 7.61%, which above 6% for 7 months now. Both supply side factors and rise in commodity prices are still daunting the inflation. Of course, the borrowers might not see their EMIs going down but this is a huge relief for larger fixed deposit investors and the FD rates will hold steady for now. This is indeed a good news as the ample liquidity in the systems is already putting a downward pressure on short term rats, which RBI too has noted. Going forward, we need to observe, high quickly the headline inflation falls below the RBI threshold limit of 4%, to give us any hope of rate cuts."

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  • December 04, 2020 / 03:49 PM IST

    RBI Monetary Policy LIVE | Reactions
    Nish Bhatt, Founder & CEO, Millwood Kane International:
    “The status quo policy by RBI is on expected lines. The assurance by the RBI to maintain surplus liquidity in the system to help boost demand and economic recovery is a big positive. It indicates easy rates to continue well into 2021. The status quo on the policy stance signals rate easing in the near future provided inflation remains under control. While the RBI hiking the inflation forecast is a cause of worry but the projection of growth rate swinging back to positive in Q3, Q4 indicates the worst may be over. The RBI keeping rates low despite high inflation shows its focus to boost economic growth over keeping inflation under check which is majorly a supply-side issue. The RBI policy is supportive of growth and in sync with the government's reform agenda.”

  • December 04, 2020 / 03:47 PM IST

    RBI Monetary Policy LIVE | Reactions
    Gaurav Garg, Head of Research, CapitalVia Global Research:
    "RBI, in its 5 th bimonthly MPC meet, followed the accommodative stance and kept rates unchanged. RBI kept repo rates at 4.00% and Reverse Repo unchanged at 3.75% with unanimous voting by all MPC members. Inflation was at a higher level in the last few quarters however, CPI inflation is estimated at 6.8% in Q3FY21. CPI inflation is expected to be at 5.8% for Q4FY21, and 5.2-4.6% in H1FY22 which might give RBI a room to continue the low interest rate regime. There have been a lot of positive events over the past month. Vaccine trials have been successful and the recovery rate in India has crossed 94% which gives a relief from further spread and the second wave of novel coronavirus. Q2 results were also better than expected for most of the companies and profit margin improvement and good growth might sustain in coming quarters as well. Healthy business growth and demand pick-up is expected to push the GDP growth in positive territory by Q4 of this financial year. RBI is expecting a strong pick up in rural and urban demand, however, lower than expected Private investment is a sign of worry. Exports are likely to go up after implementation of the vaccine programme in various developed economies. Real GDP change for FY21 is projected at a contraction of 7.5%. Projecting 0.1% growth for Q3 and 0.7% growth for Q4. RBI has successfully taken some steps which has helped in revival of economy. This low rate regime is going to fuel growth and pull India out of contraction towards positive growth rate sooner than expected."

  • December 04, 2020 / 03:42 PM IST

    RBI Monetary Policy LIVE | Reactions
    Amar Ambani, Senior President and Head of Research - Institutional Equities, YES SECURITIES:
    "In line with the expectations, RBI decided to stand pat on the policy rate and updated growth and inflation outlook given that inflation remains stubbornly high, while growth is gaining traction. The central bank scaled down on its earlier pessimistic GDP projection for FY21 as the frequency indicators and GDP data convey meaningful rebound in economic activity in both rural and urban demand. Inflation will remain as a hindrance for next two quarters and will dissuade further policy rate cuts at least for FY21. MPC did not unleash new on the non-interest rate tools, as significant measures (OMOs, TLTROs) have already been announced during the last policy meeting. The fact that liquidity remains high, while growth is gaining traction, makes us believe that RBI will adopt a wait and watch approach for next few months. Nevertheless, the MPC reiterated its accommodative stance given the transitional phase the economy is going through, in terms of recovery from the pandemic."

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  • December 04, 2020 / 03:38 PM IST

    RBI Monetary Policy LIVE | Reactions
    Padmaja Chunduru, MD & CEO, Indian Bank:
    “The tone remains dovish though repo rate change was kept on hold and adding a promise to take steps to boost growth. Continued accommodative stance will boost business confidence further. We can hope that signs of recovery in Q2 and positive growth projected for H2 will improve debt servicing capacity of corporates going ahead.”

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