RBI Monetary Policy: 5 Key Takeaways

RBI Monetary Policy:  5 Key Takeaways

The RBI Governor Shaktikanta Das today on December 4, 2020 made the bi-monthly policy announcement. The credit policy has come on expected lines. Several steps have been taken to strengthen financial stability.

RBI maintains an accommodative stance and keeps growth as its priority. The entire focus will be on how the government plans to combat the economic slowdown and boost demand. The announcement also indicated that the country's economy recovered faster than expected in the July-September quarter. Here are the key highlights from the announcement -.

  • The MPC voted to leave the policy repo rate and reverse repo rate unchanged at 4 per cent and 3.35 per cent each.
  • Contactless card transaction limit which is currently at 2,000 will be raised to 5,000 in the coming year.
  • The RTGS facility will be made operational round the clock.
  • MPC projects inflation is expected to be at 6.8 per cent in Q3 2021.
  • Recovery in rural & urban demand is expected to strengthen further.

Commenting on RBI's Monetary Policy, Abheek Barua, Chief Economist, HDFC Bank, said, "The RBI kept its policy rate unchanged at 4%, as expected, and continued to keep its policy stance accommodative. Some sections of the market had anticipated the central bank to act on the rising surplus liquidity in the system in light of the increasing inflationary pressures. However, the absence of any major liquidity absorption measures in the midst of a prolonged inflationary episode and indeed the upward revision of both the RBI’s growth and inflation forecasts might be somewhat puzzling".

He added that this could mean that RBI is a) still cautious about the durability of growth given the myriad uncertainties related to growth, b) it sees inflation as principally a supply side-problem amenable to supply rather than monetary intervention, c) it is willing to tolerate higher inflation as long as growth impulses become firmly entrenched and 4) it perhaps expects some natural moderation in liquidity as the government usually goes into collection mode in the last quarter of the fiscal. Barua added, "Given its emphasis on growth revival and the suggestion that there is still some more space left for monetary support, another 25-50 basis point cut in 1H CY2021 cannot be ruled out".

Pankaj Bansal, who is the Director, M3M Group feels that the announcements today will have a favourable impact on the real estate segment. He says, "The decision of unchanged RBI repo rate and reverse repo rate is a smart move by the government. The government has taken favourable decisions to support the real estate sector in the past few months which has positively impacted the market sentiments and will improve further in the post COVID era. In the past quarter, the sector has seen a robust response in terms of sales across spectrums. This move will further encourage prospective buyers to invest in the realty sector".

Rajiv Agarwal, MD& CEO, Essar Ports Ltd. believes RBI monetary policy announcement in line with what was expected and will help in boosting demand. Agarwal says, "We appreciate RBI’s efforts to maintain an accommodative stance. The unchanged Repo rate is understandable despite a spurt in inflation, which has been primarily driven by disruptions in the supply chain, excessive margins and indirect taxes. However, it is imperative that going forward there is a cap on lending rates for low-cost funding in order to boost the demand, the growth and the new wave of investments. This and the central bank’s recent measures along with appropriate reforms for an Atmanirbhar Bharat will definitely fuel the country’s economic revival. Improved growth projections are also reflective of an optimistic recovery led by a visible increase in urban and rural demand.”

Dinesh Kumar Khara, Chairman, SBI expressing his views, said, "The RBI policy of maintaining the status quo was expected but the continued forward guidance of an extended accommodative stance will continue to serve the markets well. The upward revision of the FY 21 GDP growth rate to -7.5 percent emphasizes that the worst is behind us though we must remain watchful. The central bank announcement of the extension of on-tap TLTRO to stressed sectors is a perfect example of coordinated monetary and fiscal policy coordination, a hallmark of the current pandemic. Allowing the RRBs to access the liquidity adjustment facility, will help RRBs to efficiently deploy and diversify their surplus funds and enlarge the reverse repo window. The move towards the strengthening of supervision of financial entities will right-size the three lines of defense in pursuit of an effective risk management framework. Measures such as digital payments supervision, deepening financial markets, and ensuring ease of doing business for export transactions are useful steps.”

RBI also announced that the limit for contactless payments will be increased from INR 2000 to INR 5000 from January 1, 2021. Responding to that, Manish Patel, Founder and CEO, Mswipe said, "At Mswipe, contactless payments have spiralled from 13% of total transactions in January 2020 to 30% of total transactions in November 2020. While the initial push this year was obviously the social distancing phenomena and minimal touching of surfaces to avoid contracting the virus, the convenience and quickness that contactless payments bring to end consumer and merchants during check out stage was the real driving factor that saw a continuous growth in contactless payments, especially QR month on month this year. RBI’s move of increasing the limit to Rs.5,000 will unlock the true potential of contactless payments and allow SMEs to accept digital payments for larger ticket size transactions. Be it a monthly kirana bill, spa service or a course fee, the spectrum of products and service that can be paid through contactless payments will definitely expand with this new move.”

Mahendra Jajoo, CIO, Mirae Asset Management India, talking about RBI Monetary Policy annoucement said, "In line with near-consensus market view, MPC kept key policy rates unchanged and maintained an accommodative stance. While the inflation projections have been revised upward, guidance is unambiguous in emphasizing the need to continue to support the nascent economic recovery currently underway. In terms of market apprehension of measures to address excess liquidity that has caused money market rates to drop below the reverse repo rate, while there is no immediate direct measure announced, MPC did mention of appropriate measures at the appropriate time, hinting some mop-up may be forthcoming soon, though most likely non-disruptive in form. With reiteration of assurance to maintain adequate liquidity and softer interest rates well in to the next financial year, its reasonably clear that interest rates are likely to remain range bound in  term. Lower bound near current levels, held by rising inflation and high fiscal deficit and higher bound held by an extremely benign central Bank".

Sanjay Palve, MD, Finance, Essar Capital Ltd. has shared the following reaction to today’s monetary policy announcement, "The RBI governor has hinted towards green shoots of economic recovery with improved projections in GDP growth. The unchanged repo rate indicates the accommodative stance of the central bank as all efforts are being made to revive growth in the economy. The urban and rural demand is gaining momentum and we can expect a similar boost in activity witnessed during the festive season going in to the new year with appropriate safety measures and norms being followed.”