Key Highlights:

  • RBI Leaves Repo Rate unchanged at 4%
  • Reverse repo rate remains unchanged at 3.35%
  • Maintained an accommodative stance.
  • Inflation is likely to remain elevated with some relief in winter months and bumper Kharif arrivals
  • Retail inflation seen at 6.8% in third quarter, at 5.8% for Q4 FY21, and 5.2-4.6% in H1 FY22.
  • RBI sees GDP for FY21 contracting 7.5%.
  • The RBI had estimated GDP to contract by 9.5% in its assessment in October
  • Expects GDP is estimated to grow by 0.1% in Q3 FY21 and by 0.7% in Q4 FY21. It is estimated to grow by 21.9-6.5% in the first half of the next financial year, with risks broadly balanced.
  • Recovery in rural demand is expected to strengthen further, while urban demand is also gaining momentum
  • RBI has decided to formulate guidelines on dividend distribution by NBFCs.
  • Commercial banks and cooperative banks will not be allowed to pay any dividends from the profits made in FY20.
  • On-tap TLTRO will be expanded to cover other stressed sectors in tandem with ECLGS scheme.
  • RTGS system to be made 24X7 in next few days.
  • From January onwards, the limit for contactless card transaction will be upped from Rs 2,000 to Rs 5,000 per transaction.
  • Regional rural banks will be allowed to access the liquidity adjustment facility, the marginal standing facility and the call money markets.

“We will continue to respond to global spillovers in order to secure domestic stability with our liquidity management operations. The various instruments at our command will be used at the appropriate time, calibrating them to ensure that ample liquidity is available to the system. Our paramount objective is to support growth while ensuring that financial stability is maintained and preserved at all times” said Shaktikanta Das, RBI Governor.

Outlook:

RBI in its Monetary has indicated that there is still room for monetary policy support for growth, which is not yet broad-based. Hence, one may expect that the RBI can cut interest rates based on the inflation trajectory. That said, a lot will depend on how food inflation moves in the next few months. The expectation is that inflation will be above 5.5 per cent for the rests of the year. Quite clearly, the scope for rate cuts in the financial year will be difficult under these conditions. It is more likely that rate cuts can be invoked earliest in financial year FY22. The RBI’s take on growth is interesting as it is looking at marginal positive growth in Q3 and Q4. This is based on faster-than-expected recoveries witnessed in several sectors including services. While Q4 forecast is more or less in lines with the market, the Q3 forecast is unique even though growth is to be just 0.1 per cent. This will imply that the RBI expects sustenance of demand in December, too. If this does happen, it can be said that growth in Q4 could be even higher. The overall forecast of -7.5 per cent for the year appears to be in line with CARE Ratings’ estimate of -7.5-7.7 per cent.

DISCLOSURE IN PURSUANCE OF SECTION 19 OF SEBI (RA) REGULATION 2014

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