RBI governor Shaktikanta Das indicted that the committee is in a tight spot as rising inflation is a threat but the economy is not out of the woods yet, thus needs constant support in terms of fiscal and monetary policy.
However, he vowed that the MPC will closely monitor all threats to price stability for broader macroeconomic and financial stability.
Key takeaways from RBI monetary policy outcome:
Juggling act: The MPC noted that supply chain disruptions are fueling inflation. At the same time, the signs of recovery are far from being broad-based and are dependent on sustained policy support.
“Accordingly, the MPC decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis,” Das said in his statement.
Call for better risk management: In the light of the collapse of two commercial banks in 2020–YES Bank and Lakshmi Vilas Bank–Das reiterated that financial sector entities like banks and NBFCs should give highest priority to quality of governance, risk management and internal controls. “They are the first line of defence in matters relating to financial sector stability,” he said.
Govt cost of borrowing lowest in 16 years: Thanks to a number of Operation Twists and targeted LTROs, RBI has managed to keep bond yields in check even as borrowings swelled to record levels. “The weighted borrowing cost for the Centre stands at a new low of 5.82 per cent as on December 1, even with additional borrowings for state governments as against 6.88 per cent during the corresponding period of last year,” said Das.
Inflation outlook raised: The RBI was forced to raise its inflation outlook as heightened food prices pushed CPI inflation sharply to 7.3 per cent in September and further to 7.6 per cent in October 2020. The committee believes cereal prices may continue to soften with bumper kharif harvest arrivals and vegetable prices may ease with the winter crop. Other food prices are likely to persist at elevated levels.
“The outlook for inflation has turned adverse relative to expectations in the last two months. Taking into consideration all these factors, CPI inflation is projected at 6.8 per cent for Q3, 5.8 per cent for Q4; and 5.2 to 4.6 per cent in H1FY22, with risks broadly balanced,” the MPC said.
Rural demand key for recovery: RBI believes rural demand, which is already a silver lining in times of crisis, is expected to strengthen further, while urban demand is also gaining momentum. While fiscal stimulus and high liquidity have been conducive in easing pressure on the economy, private investment is still slack and capacity utilisation has not fully recovered.
Thus, RBI has revised real GDP growth at -7.5 per cent in 2020-21. What is important is the central bank sees no more contraction in the economy from the current quarter onwards.
More sectors under On-tap TLTRO: RBI decided to include more sectors in the scheme that was announced after the last policy meet in order to build synergy with the government’s emergency credit guarantee scheme. This will encourage banks to extend credit support to more stressed sectors at lower cost, fueling growth.
Banks barred from paying dividend: The central bank extended the time period during which banks have been barred from announcing dividends, which will leave them with more capital for lending and contingencies.
RTGS to be 24X7: After NEFT, RBI said it will make RTGS facility, used to transfer large amounts, 24×7 soon. This will make the payment ecosystem more efficient.
Contactless payment limit to be raised: RBI proposed to enhance, at the discretion of the user, the limits for contactless card transactions and e-mandates for recurring transactions through cards (and UPI) from Rs 2,000 to Rs 5,000 from January 1, 2021.
Unanimous decision: All members of the MPC – Shashanka Bhide, Ashima Goyal, Jayanth R. Varma, Mridul K. Saggar, Michael Debabrata Patra and Shaktikanta Das – unanimously voted for keeping the policy repo rate unchanged, highlighting that everyone is on the same page.
However, analysts will wait for minutes of the meeting to be released on December 18 to see if any member put forth hawkish views.