RBI- PROVIDES STABILITY IN UNCERTAIN TIMES
The RBI Policy was very much on the expected lines – some form of certainty in today’s uncertain times. And the markets went on to hit a new high – Sensex went on to 45,000 – a record high! The spurt was led mainly by the bank stocks – relieved that liquidity was left intact in the system.
And this was despite the RBI upping the inflation target, which was cushioned by upping the growth forecast. The balance was acknowledging that inflation is going up while not spooking the bond market and ensure that the Govts borrowing program went on smoothly.
More than headline inflation, we need to keep a watch on the core inflation – if that begins to come down, even if the headline stays up, RBI will heave a sigh of relief but if core inflation remains up, then RBI will need to get progressively cautious.
RBI Governor maintained the “accommodative” stance and this was a good move, despite the rising inflation, keeping the continuity in the outlook. Given that the growth recovery has just started, its good that nothing was done or else it will topple the apple cart. RBI, as the Governor said, will step in whenever required to taper off the liquidity – that will happen as when data comes in that growth is on firm grounds and inflation is in control; at that time RBI will drain the liquidity next year in a slow, calibrated manner.
What is really the concern is that there is no credit offtake; there is liquidity but borrowing is not yet happening and that demand revival for credit is something which only the Govt can get going. Until the threat of the second wave does not dissipate and vaccine/cure doesn’t take off, this sense of uncertainty will keep the credit demand low.
What we can also conclude as of now is that rates will neither go down nor up for some more months now. Today’s policy is reassuring to the markets but not really enough to provide any real further kick – that onus really lay on the Govt going forward.
A quick look at the highlights:
- No change in repo rate, remains at 4%
- Reverse repo remains at 3.35%
- Marginal standing facility (MSF) rate and the Bank Rate remains at 4.25%
- Decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year.
- Outlook for inflation has turned adverse relative to expectations in the last two months.
Inflation target:
- CPI inflation is projected at 6.8% for Q3FY21
- 5.8% for Q4FY21 and 5.2% to 4.6% in H1FY22
Growth target:
- Real GDP growth projected at (-)7.5% for FY21
- (+)0.1% in Q3FY21 and (+)0.7% in Q4FY21
- (+)21.9% to (+)6.5% in H1FY22
6th Dec 2020 at 11:21 pm