All eyes are now set on the Reserve Bank of India (RBI) governor Shaktikanta Das who along with monetary policy committee (MPC) members will present India's fifth bi-monthly monetary policy outcome on Friday. Majority investors, experts, economists and market participants are expecting for another status quo as inflation data continues to escalate above RBI's target.
In the previous policy, RBI kept the policy repo rate unchanged at 4%. Similarly, the reverse repo rate under the LAF remains unchanged at 3.35 %. While the marginal standing facility (MSF) rate and the Bank Rate at 4.25%.
The central bank has also kept the monetary policy stance to accommodative.
Whether 'Rate Cut' or 'Not', below mentioned factors will play a major role in RBI policy outcome.
Liquidity:
According to CARE Ratings' report, the outstanding liquidity in the banking system widened further during the week ending November 27, 2020. The outstanding liquidity aggregated Rs. 5.37 lakh crore as on November 27, 2020, Rs. 16,692 crore higher than Rs. 5.20 lakh crore as on November 20, 2020. Daily, it reached its lowest level on November 23 to Rs. 5.05 lakh crore and increased gradually thereafter reaching a peak on November 26, 2020, at Rs. 5.54 lakh crore.
Further, the report said, so far this fiscal, the RBI has undertaken total OMO purchases of Rs 3.27 lakh crores while OMO sales of Rs 99,900 crores (including simultaneous purchase and sale of OMOs).
Crude oil:
In November, the price of Brent Crude and WTI has increased by 6% and 5.1% during as against the price prevailing during October 2020 but in retrospect has declined by 29.8% and 27.1% as against the price prevailing during the same month in the previous financial year, as per data compiled by CARE.
Rupee:
CARE stated that the rupee continues to gain strength internally based on fundamentals besides the external factor of the dollar getting weaker. Since the beginning of the financial year, $ 97.5 bn has flowed in till November 20th taking the count up to $ 575 bn. In November till the 20th there was an accretion of $ 14.5 bn which is quite remarkable.
Bond yields:
The average benchmark 10- year GSec yields declined by 3 bps to 5.89% in November from a month ago. The decline in GSec yields was aided by the RBI’s measures announced in the monetary policy (9 Oct’20) to boost demand for government securities viz. increase in OMO purchases, liquidity infusions through TLTRO, and increased time limit for keeping government bonds in HTM category (till Mar’22), as per CARE.
GDP:
India's Gross Domestic Product (GDP) stood at a contraction of 7.5% in Q2FY21 against the growth of 4.4% in Q2FY20. In the June 2020 quarter, the GDP contracted to 23.4%.
In Q2FY21, quarterly GVA contracted to 7% to Rs30.49 lakh cr against Rs32.78 lakh cr a year ago same period.
In CARE's view, GDP growth although expected to improve in the remaining two quarters of 2020-21 with the improved pace of pickup in economic activity across most sectors. The economy, however, continues to face downward pressured from the sustained spread of the pandemic in the country and the re-imposition of restrictions in various regions.
CARE added that the consumption demand and investments which is necessary to propel the economy would continue to be tepid and is unlikely to see a noteworthy improvement during the year.
Index of Industrial Production (IIP):
IIP recorded a growth of 0.2% in September 2020, compared to degrowth of 8% in August 2020 and (-)4.6% a year ago same month.
CARE said, "The positive growth in IIP reflects the resumption of business activities in the industrial sector with both mining and electricity recording positive growth while manufacturing registered a contraction, albeit with a sharp improvement from the previous month."
"With the unlocking of the Indian economy after further easing of lockdown restrictions, faster resumption of business activities and return of the labourers for working in factories will result in further improvement in industrial production going ahead," CARE said.
CPI Inflation:
India's consumer price index (CPI) or retail inflation reached to 7.61% in October 2020, compared to 7.27% of the previous month. With that, India's inflation has skyrocketed to a 77-month high. Inflation currently is the highest since May 2014 where the CPI stood at 8.3%.
Consumer food price index (CFPI) was also higher at 11.07% in October 2020 versus 10.68% of the previous month.
Talking about October inflation data, CARE said, "The reading came higher than our estimate of 7.4% for the month. For 13 months in a row, the retail inflation remained above the RBI’s 4% inflation target while it breached upper tolerance level of 6% for successive 7 months."
CARE further said, "Inflation will remain elevated for the next few months driven primarily by the food and miscellaneous segment. High inflation gives no scope to MPC to lower rates further this year. The RBI action will be through the liquidity route henceforth."
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