Key takeaways from the October 21 policy review
Based on the recent economic conditions, the RBI MPC suggested domestic considerations may outweigh the global. In a unanimous decision, it maintained an accommodative approach by leaving the repo rate unchanged at 4.0%, the reverse repo rate at 3.35%, and the MSF rate at 4.25%.
Here’s how it might impact borrowers and investors:
Economy: The GDP forecast is found to remain unchanged at 9.5% YoY for FY22 and the MPC is circumspect of India’s growth outlook owing to output still being below pre-COVID level. The MPC acknowledged the ongoing normalisation in high frequency indicators, but cautionary measures because of COVID uncertainties and supply disruptions, sub-par capacity utilisation, along with subdued credit growth indicate a sustained challenging growth environment.
Inflation: FY22 Consumer Price Index (CPI) inflation projection was found to have lowered to 5.3% from 5.7% before. The catch-up in kharif sowing and record production were expected to have a salutary effect on food inflation, alongside administrative measures by the government (import tax cuts). However, the upturn in commodity prices, including oil, metals, elevated inputs prices - shortage of raw materials, high logistics costs – were viewed as risks and keeping core pressures up.
Liquidity: There is need for more liquidity support, but the RBI suggests that this process be “gradual, calibrated, and non-disruptive” in order to be in sync with the pace of economic developments. In this regard, the RBI will be scaling the variable reverse repo rate gradually from INR 4trn to INR 6trn by early December. In what is being perceived as a tapering signal, the RBI is suspending the G-Sec Acquisition Program (G-SAP) auctions.
Additional measures: The MPC outlined other steps including encouraging retail digital payment solutions in the offline mode since the success of the pilot runs. It is extending the interim enhancements limits on the Ways and Means Advances (WMA) provision for states and union territories up to March 2022, to help them tide over the pandemic-induced difficulties. Lastly, the RBI is also extending the three-year long-term Special Long-Term Repo Operations (SLTRO) for Small Finance Banks (SFBs) till December 31, 2021.
Overall, the RBI’s bi-monthly policy’s accommodative stance indicates its aim to keep optimism among market participants. Learn more about monetary policy updates and how it helps manage the impact of inflation in India and on your pocket. Download the report.
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