The Reserve Bank of India’s Monetary Policy Committee voted on Friday to keep key rates unchanged and maintained an accommodative stance, Governor Shaktikanta Das announced. With this repurchase rate it remains at 4.0% while the reverse repurchase rate remains at 3.35%
The development comes amid signs of recovery in the economy badly hit by the coronavirus pandemic.
“The nation’s mood has turned to confidence and hope,” Shaktikanta Das said, adding that GDP growth may turn positive for the fourth quarter of fiscal 21. A triple-speed recovery in activity is expected. economic; however, real GDP is expected to decline by 9.5 percent. He said the focus should shift from containment to reviving the economy.
In announcing the political decision, RBI Governor Shaktikanta Das said the RBI will make special and unreserved bond purchases. The size of these special and direct OMOs will be increased to Rs 20,000 cr.
The accommodative stance would be maintained “for as long as necessary, at least during the current financial year and for the next year to reignite growth in a lasting way and mitigate the impact of Covid-19 while ensuring inflation remains within target in the future”. Das said in a live video on Friday.
The decision was the first in a newly formed MPC, which includes three external members that have in the past supported monetary and fiscal stimulus to boost the economy. The previous MPC had cut interest rates 115 basis points this year.
The governor said the central bank is ready to take more measures on liquidity and announced a series of measures on Friday:
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 expects inflation to decline about 4 percent in the fiscal fourth quarter ending in March, the midpoint of its target range of 2 to 6 percent. He expects gross domestic product to contract 9.5 percent in fiscal 2021, but a faster recovery is feasible.
The economy has slowly recovered as the coronavirus continues to spread rapidly in India, home to the second highest number of virus cases in the world. The Organization for Economic Cooperation and Development forecasts that the economy will contract 10.2 percent this year, while Goldman Sachs Group Inc. predicts a contraction of 14.8 percent.
“We suggest that GDP growth can come out of contraction and turn positive for” the fourth fiscal quarter, Das said.
The central bank will rationalize risk weights for all new home loans by March 31, 2022. The RBI will also extend the joint loan scheme to all NBFCs, HFCs, said the RBI governor.
The RBI is also proposing 24-hour RTGS availability starting in December 2020, the governor said.
In a Business Standard survey, all 10 participants, including economists and bank treasurers, expected the RBI to stop.
Most observers said the reason for more rate cuts, at least in this calendar year, is over for the RBI. The MPC can get perspective only after looking at the budget math and fiscal deficit figures. Any rate cuts now won’t add much value either, considering the pass-through of past cuts hasn’t happened.
The announcements made by Governor Shaktikanta Das come more than a week after the MPC meeting was postponed due to the delay in appointing external MPC members.
On Monday night, the government appointed Jayanth Varma, a professor at the Indian Institute of Administration in Ahmedabad; Ashima Goyal, member of the Prime Minister’s Economic Advisory Council; and Shashanka Bhide, Senior Advisor to the National Council for Applied Economic Research as external members of the MPC.
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The MPC was originally scheduled to meet on September 29, September 30, and October 1, but new members were not named at the time. While new members are domain experts, they will see more granular data at the RBI than is available to the public. Therefore, economists say, they are unlikely to prevail at the first meeting and would like to adopt a standstill policy.
All three positions were vacated after Pami Dua, Chetan Ghate and Ravindra Dholakia resigned from their positions on September 22. They had technically left their posts after the August monetary policy meeting, but the government delayed the appointment of their successors.
All eyes were also on the RBI’s monetary policy, not for any action in terms of a rate cut, but for the central bank’s assessment of GDP growth for the current year. So far, he 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 slumped 23.9% in the second quarter from a year earlier, making India the worst performer in Asia.
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