On December 4, after the conclusion of deliberations of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), which met from December 2, the MPC voted unanimously to leave the policy repo rate—the rate at which the central bank lends to other banks—unchanged at 4%. The equity markets reacted to the policy by pushing the S&P BSE Sensex and Nifty 50 to new lifetime highs of 45,033.19 points and 13,250.3 points, respectively.

On the policy front, the MPC also decided to continue with its accommodative stance as long as necessary—at least through the current financial year and into the next year—to revive growth on a durable basis and mitigate the impact of Covid-19, while ensuring that inflation remains within the target going forward.

Explaining the rationale behind maintaining status quo, RBI governor Shaktikanta Das said that the MPC was of the view that inflation is likely to remain elevated, with some relief in the winter months from prices of perishables and bumper kharif arrivals. “This constrains monetary policy at the current juncture from using the space available to act in support of growth,” Das said.

On the external front, the RBI governor highlighted that the prospects of political stability and expectations of fiscal stimulus have churned up risk appetite, causing investors to exit the safe haven of U.S. treasuries and search for returns. “As a consequence, surges of capital flows have flooded into India,” Das added. He also emphasised that the RBI will continue to respond to global spillovers in order to secure domestic stability with its 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,” Das reiterated thrice. He added that instruments like open market operations (OMO) purchases, operation twists, and reverse repos will continue to be used. “Our paramount objective is to support growth while ensuring that financial stability is maintained and preserved at all times.”

On inflation, the MPC took note of the consumer price index (CPI) rising sharply to 7.3% in September and further to 7.6% in October. “The outlook for inflation has turned adverse relative to expectations in the last two months,” said Das. According to the MPC, while cereal prices may continue to soften with the bumper kharif harvest arrivals and vegetable prices may ease with the winter crop, other food prices are likely to persist at elevated levels. “Cost-push pressures continue to impinge on core inflation, which could remain sticky,” Das added. Basis these factors, the MPC projected CPI at 6.8% for Q3FY21, 5.8% for Q4FY21; and 5.2 to 4.6% in H1FY22, with risks broadly balanced.

On GDP projection, the RBI governor said that the attention needs to turn to nurturing the recovery beyond the meeting of pent-up demand and focus on setting it on a firm trajectory of sustained, high quality growth. “Data that have become available for Q3FY21 confirm that the economy is recuperating faster than anticipated and more sectors are joining the multi-speed upturn that I had highlighted in my statement in October,” said Das. The contraction in Q2 in the end-November preliminary estimates from the National Statistical Office (NSO) has turned out to be shallower than projected in October.

On growth outlook, Das said that the recovery in rural demand is expected to strengthen further, while urban demand is also gaining momentum. Consumers remain optimistic about the outlook and the business sentiment of manufacturing firms is gradually improving, he said.

“Fiscal stimulus is increasingly moving beyond being supportive of consumption and liquidity to supporting growth–generating investment,” said the RBI governor. “On the other hand, private investment is still slack and capacity utilisation has not fully recovered,” Das warned. Further, while exports are on an uneven recovery path, the prospects have brightened with progress on the vaccines front. Basis these factors, the RBI governor projected that real GDP growth would contract by 7.5% in FY21. This includes an increase of 0.1% and 0.7% each in Q3FY21 and Q4FY21, respectively; and 21.9% to 6.5% in H1FY22, with risks broadly balanced.

According to V. K. Vijayakumar, chief investment strategist at the Kochi-headquartered Geojit Financial Services, the status quo in policy rates and the policy stance were on expected lines. While there was no market-moving announcement in the policy, the overall policy tone was positive, he said.

Vijayakumar also emphasised that the central bank has reiterated that it will use appropriate policy instruments to ensure ample liquidity to support growth. “The revision of FY21 GDP growth rate to minus 7.5% is positive,” he said. “RBI's projection of GDP growth to be positive for H2FY22 is in line with the market's optimism.”

For Ashish Shanker, deputy MD and head of investments at Motilal Oswal Private Wealth Management, the RBI’s guidance on growth and flows was better than earlier, and positive for markets. Also, the RBI prioritising growth over inflation was an acknowledgment that inflation drivers seemed to be more supply-side led, he said. “An accommodative liquidity stance will ensure that access to liquidity will not be a challenge, and the ongoing recovery continues to gather steam,” Shanker said. “This will help push through government borrowings in a year where the revenues are under pressure.”

Going forward, the growth–focussed central bank is likely to keep policy rates on hold in the near future, which in turn could keep the bulls charged up.

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