RBI Monetary Policy Committee Meeting: Indian Economy To Shrink By 9.5% in FY21

  • Market Overview

RBI’s newly constituted MPC came out with its first monetary policy decision on 9th October with RBI Governor Shaktikanta Das announcing a slew of measures along with maintaining a status quo on repo rate and reverse repo rate. The 3-day deliberations of the newly formed MPC began on 7th October.

The policy meet was earlier scheduled between 29th September-1st October but was rescheduled due to the non-appointment of 3 external members to the monetary policy committee.

Key takeaways from the RBI Monetary Policy meet:

1. The key policy rates were unanimously kept unchanged by the MPC on expected lines. The repo rate was unchanged at 4%, the reverse repo rate at 3.35%, and CRR at 3%

2. Policy stance, too, remains unchanged as Governor Das maintained a status quo on the accommodative stance

3. The central bank expects a contraction of 9.5% in the real GDP in FY21 with growth visible only in the 4th quarter of FY21. However, the MPC sees the growth to rebound in FY22

4. Concerning inflation, RBI forecasts inflation to stay above the 4% levels in FY21 with some ease off expected in the last two quarters of this financial year

5. The liquidity measures of RBI will now include the revival of specific sectors who have forward and backward linkages and multiplier effects on growth

Until March 2021, RBI will conduct on tap TLTRO (Targeted Long-Term Repo Operations) at 4% (for Rs 1 lakh crore) along with other outright bond purchases. In an LTRO, the RBI allows banks to provide government securities as collateral and lets them borrow funds with a tenure of one to three years at repo rate. In a TLTRO, the RBI wants the banks to invest the funds (borrowed from LTRO exercise) into investment-grade corporate debt

In the next week, RBI will conduct Open Market Operations (OMOs) worth Rs 20,000 crore

Until 31st March 2021, the limit for WMA for the center has been kept at Rs 1.25 lakh crore against Rs 35,000 crore in H2 of FY20. The facility of WMA limit for states, that saw an increase of 60% for the 1st half of FY21, has been extended up to 31st March 2021.

WMA is referred to as Ways and Means Advances wherein the center and the states can borrow from RBI to fill up the temporary mismatch in cashflows of their expenditures and receipts

6. To provide additional support to financial entities, RBI extended the SLR (Statutory Liquidity Ratio) holdings in HTM (Held-to-maturity) category to 22% from the previous 19.5% up to March 2022

7. Apart from the above-mentioned measures, the regulator has taken up the challenge to boost exports, provide regulatory support to improve the credit flow by taking care of credit discipline

8. RBI further intends to deepen the financial inclusion and promote ease of doing business by providing 24*7 RTGS facility on all days of the week for high-value transactions

9. RBI Governor Shaktikanta Das was quite optimistic about the agriculture sector as India’s foodgrain production are set for a record high in this financial year

With the support of positive cues in the domestic equity markets and a weak US dollar, the Indian Rupee strengthened by 9 paise to close at 73.24 against the dollar after the RBI policy meeting. Governor Das sounded optimistic about India’s economic revival as many sectors were off their contractionary phase in Q1 of FY21.

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  • Vinod Dhariwal @Vinod Dhariwal
    what positive is here for bull run
    Like 2

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