RBI kept the policy rate unchanged. Expect a K-shaped recovery this time

A little late RBI’s monetary policy meet due to unavailability of all delegates to take decision on borrowing rates has maintained the status quo by keeping the interest rates unchanged at 4%. The MPC meet was forced postpone due to delay in appointment of three committee members in order to replace three earlier economists who were discharged after competing their tenure. Every policy meet conducted by RBI Governor is mainly focused on setting the borrowing rates considering various quantitative and qualitative factors and upcoming forecast. However, this monetary policy committee has majorly focused on revival and growth forecast of Indian economy as the economy has faced tough time due to Covid-19 pandemic that has not only dampen India’s EXIM numbers but has also worsen the domestic manufacturing and service sectors.

An ‘accommodative’ stance has been observed in the speech from Shaktikanta Das, RBI Governor in order to spur the revival and growth prospects and mitigate the impact from ongoing pandemic. The committee has decided to kept the repo rate at 4% and reverse repo rate at 3.35% and claims to kept them further stable as long as we achieve the position of restoration. While, keeping the interest rates unchanged was highly expected by market participants as less room is left for any further cut but the MPC’s flirt with other quantitative tools has proved that the central bank is clearly looking to elevate the inflation in FY21. The RBI-led-MPC has announced an expansion in Open market operations (OMO) purchases including Targeted Long Term Repo Operations (TLTRO) of Rs. 1 trillion and State Development Loans. This will reduce cost for private companies while raising funds.

In the speech of monetary policy committee, RBI Governor Shaktikanta Das has emphasized more over sector specific recovery rather than an overnight change in all sectors. The imbalance in sector recovery will continue to persist more and patience is the name of the game this time. The central bank has stated that supply chain disruptions due to pandemic has affected the food and non-food procurement because of which upside risk of food prices is due. On the real GDP front, central bank expects real GDP growth to remain negative. The agriculture and allied activities were more in focus for which 5 thousand crores additional Special Liquidity Adjustment has been announced for NABARD in order to avoid liquidity disruptions. The central bank has announced that funds not more than 75% of the mortgage securities will be discharged to famers for agriculture purposes. The RBI has also announced 5 thousand crores additional Special Liquidity Adjustment for NHBs to support housing division.

The quick recovery in agriculture and its allied activities will also support Fast Moving Consumer Goods (FMCG) sector, two-wheeler segment and tractors while some sectors will have to wait as the demand will take more time to get back at previous levels. So, more of a K-shaped recovery is expected this time as a few sectors have got the limelight early and imbalanced sector revival is highly expected.


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