RBI Governor hands over goodies to market's delight, while keeping key rates unchanged

The RBI gave almost everyone the much-needed Friday thrill.

The central bank's Monetary Policy Committee (MPC) kept key policy rates unchanged, but Governor Shaktikanta Das managed to hand over candies much to the market's delight. Repo and reverse repo rates stand at 4% and 3.35% respectively. 

Among others, the goodies box had a few key elements. First, Das sent out a clear signal on maintaining an accommodative stance both on rate cuts and liquidity, even if it commands continuity of unconventional tools like TLTROs, until at least March.

Taking the chalk from the Kamath committee recommendations, RBI decided to extend the on-tap targeted long-term repo operations to 26 stressed sectors including healthcare. The move will encourage banks to extend credit at lower cost. The central bank will conduct special and outright bond purchases and on-tap TLTROs for Rs 1 lakh crore at 4% till March, besides OMOs worth Rs 20,000 crore. 

ALSO READ: RBI projects 6.8 per cent retail inflation in December quarter

Two, RBI estimates that the GDP growth may turn positive in Q3 itself, even though it's pegged down to the decimal at 0.1%. But it's expected to do better at 0.7% taking the full year contraction to 7.5%, a full 200 bps better than the previous estimate of 9.5%. In essence, growth could be a game of two halves. If the record-high 24% Q1 contraction brought the Indian economy down a peg, Q2 was several shades better, putting the wind in the sales of recovery. 

Three, inflation has been a problem child, but since it's driven by supply side pressures, no rate hikes are warranted and Das indicated as much. CPI may remain elevated in coming months, but one can expect relief in winter months from prices of perishables and bumper kharif arrivals. So inflation is now projected at 6.8% for Q3 and 5.8% for Q4, with risks broadly balanced. In any case, it's above MPC's comfort band of 4-6%.

Lastly, on the regulation front, Das asserted that drafts being issued were strictly to seek comments. The remarks are important. Last month, the central bank published an internal working group report on ownership of Indian banks, which generated intense debate. Some even projected as though RBI had already decided on the terms but launched a public consultation only as cover for the exercise, which simply wasn't the case. Das' Friday quip should rest the case. 

As for NBFC, RBI believes the current regulatory regime warrants a review and a discussion paper is expected before January 15. 

So brace up for tighter scrutiny. 

The standout in Friday's policy review was RBI's clarity of thought, to which markets salivated in no time. The Governor communicated with thoughts and estimates alone, but it was enough for traders and investors to voice their chest-thumping approval taking the Sensex to a record-high 45,000-level.