In line with market expectations, RBI's Monetary Policy Committee on Friday unanimously decided to keep policy repo rate unchanged at 4 per cent with an accommodative stance. Reverse repo rate was kept unchanged at 3.35 per cent and Marginal Standing Facility (MSF) and the bank rate remained at 4.25 per cent.
Commenting on the RBI's policy stance, Soumya Kanti Ghosh, Chief Economic Adviser at State Bank of India (SBI) said that the move was "overwhelmingly positive" with a host of regulatory and development policies that was in sync with a coordinated approach of the government and the central bank to revive the economy. "These measures emphasise the RBI fixation of ensuring financial market stability against a tail event of unprecedented nature," SBI Ecowrap report said.
The RBI pegged real GDP to decline by 9.5 per cent in the financial year 2020-21 (FY21) with 9.8 per cent decline in Q2, 5.6 per cent decline in Q3 and a positive growth of 0.5 per cent in Q4. For Q1 FY22, RBI projected a growth rate of 20.6 per cent due to huge base effect.
The economists at SBI, however, believe that all the four quarters of this fiscal will remain in negative territory and any positive growth will be seen only in FY22.
"The good thing is, however, looking at the spread of COVID infection, India seems to have reached a peak with maximum daily cases on 16 September 2020. The penetration in rural areas which increased since July has now moderated. However, the cases are increasing in urban areas which in turn raises questions on the sustainability of economic recovery going forward," the report noted.
On RBI's CPI inflation target, SBI Ecowrap report said weak pricing power, subdued demand, supply disruptions, labour shortages and high transportation costs are some of the major risks for retail inflation, going forward. The RBI has projected CPI inflation at 6.8 per cent for Q2 FY21, at 5.4-4.5 per cent for H2 FY21 and 4.3 per cent for Q1 FY22 with balanced risks.
Besides, the RBI unveiled several regulatory measures in the policy. First, in order to reduce the cost of credit for the regulatory retail portfolio (RRP/75 per cent risk weight) consisting of individuals and small businesses (i.e. with turnover of up to Rs 50 crore), and in harmonisation with the Basel guidelines, RBI has increased the threshold to Rs 7.5 crore from Rs 5 crore, in respect of all fresh as well as incremental qualifying exposures. Given that working capital limits such as CC/OD etc. are being treated as new loans on renewal and considering 25-50 per cent of the total outstanding as working capital limits , banks can still save capital of Rs 1,250-2,500 crore.
"This measure is expected to give relief to big ticket loans of say above Rs 75 lakh, present share of which is around 12-15 per cent of the total housing loan portfolio, where risk weight is higher. Assuming a growth of 20 per cent for next 18 months this could reduce the capital requirement of around Rs 500 crore, which could enable banks to ease rates to boost demand," the SBI report said.
The central bank last revised its policy rate on May 22. It maintained status quo for the second time in a row where the new MPC members voted for the first time and there was a dissent by Prof. Jayanth Varma regarding the stance of the policy. The MPC meeting was held after the government filled the position of three external members to the panel by the appointment of Ashima Goyal, Jayanth Varma and Shashanka Bhide for a period of four years.
By Chitranjan Kumar