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Macroscope – RBI Monetary Policy Meet Policy Update for the month December 2020

Written by - Tejesh Kumar

December 4, 2020 2 minutes

What is the latest RBI MPC Meet reading?

RBI keeps interest rates unchanged at 4.00%, maintaining accommodative stance. Reverse Repo also held at 3.35%.
This is 2nd time in a row RBI chooses to hold key rates, with inflation rising to highest level in more than 6 years at 7.61%.

Macroscope

MPC’s decision is on expected lines as inflation continues to surprise on the upside, staying above upper tolerance level of 6% for 7 straight months.

Supply-side shocks due to viral virus such as labour shortages, higher input & output prices, and higher taxes contributed to a spike in headline and core inflation.

In maintaining its stance, The MPC reiterated the October guidance, stating that policy would remain accommodative for well into next financial year. Economic health & wealth will continue to drive policy direction and stance.

In talking about further cuts, MPC noted of constraints in place which are derived by inflation likely carrying its elevated print in times to come.

Inflation outlook worsened as expectations for the same worsened vis-à-vis estimates made over the last 2 months, courtesy of supply-side bottlenecks.

In giving estimates, MPC put forward following CPI print figures:
❖ 6.8% for Q3FY21
❖ 5.8% for Q4FY21
❖ 5.2-4.6% for H1FY22

Talking of growth, MPC affirmed India’s technical recession but said strength in economic indictors carry upside risks to growth.

Recovery in rural demand is expected to strengthen further with urban counterpart to pick momentum.

In giving estimates, MPC put forward following GDP growth print figures:
❖ Real GDP growth to come in at -7.5% in 2020-21
❖ GDP to grow by 0.1% in Q3 FY21 0.7% in Q4 FY21.

Govt. policed distance guidelines and subdued private investments are key risks to growth going forward.

Speaking on liquidity, RBI governor maintained his voice and action on promoting easy access of liquidity across the credit system in the country.

Acknowledging foreign flows, RBI said it will continue to formulate supportive policies with aim to directly benefit financial stability.

Key takeaways:

The heavy inflation outlook can birth stay in rate cycle for near term. The main reason for inaction today were the stickiness in inflation, and COVID-19 related supply disruptions.

We foresee a pause in cycle in short-term, especially after cumulative cuts in repo and reverse repo rates by 115bp and 155bp this year.

Click here If you want to read the complete MPC Meet press release.

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