The Reserve Bank of India (RBI) left key interest rates unchanged on Friday but signalled more easing ahead to support an economy that it sees contracting 9.5% in the current fiscal.
The six-member Monetary Policy Committee, with three newly inducted external members, voted unanimously to retain the benchmark repurchase or repo rate at 4 per cent while keeping its policy stance accommodative, implying it could ease again.
The central bank had slashed the repo rate by 115 basis points since late March to support growth.
Lending rate
The Monetary Policy Committee of the central bank in its penultimate meet for 2020, decided to maintain the repo rate -- or short-term lending -- rate for commercial banks, at 4%.
Besides, the reverse repo rate stands unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the 'Bank Rate' at 4.2%.
The MPC voted to maintain accommodative stance, thus opening up possibilities for more future rate cuts.
It was broadly expected that the RBI's MPC might hold rates as recent data showed that retail inflation has been at an elevated level during June.
"The MPC evaluated domestic and global macroeconomic and financial conditions and voted unanimously to leave the policy repo rate unchanged at 4%," RBI Governor Shaktikanta Das said.
"It also decided to continue with the accommodative stance of monetary policy as long as necessary -- at least during 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."
9.5% GDP contraction
RBI Governor Shaktikanta Das said the economic growth, which slumped to a negative 23.9% in the April-June quarter, will turn positive only in the final January-March quarter.
"By all indications, the deep contractions of Q1 2020-21 (April-June) are behind us; silver linings are visible in the flattening of the active case load curve across the country," he said.
Barring the risk of a second wave of infections, the economy appeared poised to begin a recovery, he said, noting food grain production was set for record highs and factories and cities were coming back to life.
With macro indicators pointing to a recovery, "GDP growth may break out of contraction and turn positive by Q4 (January-March)," he said.
"For the year 2020-21 as a whole, therefore, real GDP is expected to decline by 9.5%, with risks tilted to the downside," he said, adding that if the current momentum of upturn gains ground, a faster and stronger rebound is eminently feasible.
"Against all odds, we shall strive and revive," he said.
Das also unveiled a number of unconventional measures to boost liquidity and support economic activity while ensuring the government's record borrowing programme goes through smoothly.
In a video live stream, he said RBI will "continue with the accommodative stance of monetary policy as long as necessary - at least during 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".
Industry reaction
RBI’s 9.5% contraction forecast was much anticipated: Dr Hiranandani
“It affirms our beliefs that the worst is over for the Indian economy. The RBI governor also confirmed that the contraction in economic growth witnessed in the April-June quarter with 23.9 percent is behind us. He also accepts that growth is likely to pick up in the second half of the fiscal and enter into the positive zone in the January-March quarter,” ASSOCHAM president Niranjan Hiranandani said.
According to Dr. Hiranandani, the RBI’s decision to keep key rates unchanged was also much anticipated. “Further reduction in key interest rates was not a possibility at this juncture. The RBI’s decision to extend the scheme for co-lending to all NBFCs, HFC in respect of all eligible priority sector loans will allow greater operational flexibility to the lending institutions and is much welcomed,” he said.
RBI’s decision to rationalise the risk weights on home loans and link them to Loan to value ratios only will give a boost to the real estate sector as well, he said.
“Particularly this step would benefit borrowers of higher value loans. It would ensure that more credit is available to borrowers. This move is a much appreciated step recognising the role of the real estate sector in generating employment and economic activity,” he added.
Dr. Hiranandani explained that the industry welcomes the Reserve Bank of India’s announcement to undertake further measures as necessary to assure market participants of access to liquidity and easy finance conditions. “The RBI has through its proactive measures taken honest efforts to provide access to easier credit to smaller businesses. However, we believe further steps would be needed to revive the economy,” he said.
Imperative for banks to reduce lending rates: Bennet & Bernard Group chairman
Lincoln Bennet Rodrigues, Founder and Chairman, Bennet & Bernard Group, said any further rate cut at this point of time would have definitely added to the positive sentiment. "However, at the same time, it is imperative for banks to reduce lending rates as this is the need of the hour to further see a boost in the real estate sector," he said.
Bennet & Bernard Group is a leading luxury real estate developer known for their luxury holiday homes in Goa.
"As the Covid 19 situation has altered our way of living, this festive season is opportune for investors to look at Goa seriously for a second-home investment and destination for luxury homes. As a premium real estate developer and catering to the elite segment, we remain optimistic for this season too. We have already witnessed an increase in the number of enquiries for our luxury villas and properties in Goa that offer safety, privacy and luxury, all in one space," he added.
CARE Ratings
Credit rating agency CARE's Ratings said it continues to project the RBI to announce another rate cut of 25 bps once headline inflation in the economy
abates and provides the monetary space to support economic growth.
"We believe the economy will contract by around (-)8% to (-) 8.2% in FY21 with a downward bias which is better than the MPC’s projection of (-) 9.5%," the agency said in its review of RBI's policy announcement.
"Also, we project inflation to average around 5.5% for FY21. The moderation in inflation rate would be more due to base effects rather than prices of food prices easing in the coming months," it said.
The RBI will continue to announce liquidity supporting measures to ease financial conditions and manage the yield curve, it added.
(With agencies)
