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Has Guv Das turned hawkish? Key takeaways from RBI money policy

The MPC revised down real GDP growth for 2019-20 from 6.1% in October policy to 5%.

, ETMarkets.com|
Updated: Dec 05, 2019, 03.40 PM IST
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RBI Monetary Policy December 2019: Key takeaways
RBI Monetary Policy December 2019: Key takeaways
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Thursday maintained status quo on repo rate, the rate at which it lends to banks, recognising the rise in inflation caused by soaring food and vegetable prices.

It is for the first time that the MPC led by Shaktikanta Das turned hawkish ever since the new governor took over exactly a year ago last December. In fact, Das said it in as many words that “inflation control is the prime objective of RBI’s money policy.”

The repo rate stood at 5.15 per cent post the policy review.

Accordingly, the reverse repo rate under the LAF remained unchanged at 4.90 per cent, and the marginal standing facility (MSF) rate and the bank rate at 5.40 per cent.

The MPC, however, decided to “continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.”

Here are key takeaways from the money policy review:

GDP projection cut sharply
The MPC revised down real GDP growth for 2019-20 from 6.1 per cent in October policy to 5 per cent, a cut of 110 basis points. “Based on the early results, the business expectations index of RBI’s industrial outlook survey indicates a marginal pickup in business sentiments in Q4,” MPC noted.

However, the committee members said monetary policy easing since February 2019 and measures initiated by the government over the past few months are expected to revive sentiment and spur domestic demand.

Inflation projections raised
The MPC raised its CPI inflation projection upwards to 5.1-4.7 per cent for H2FY20 and 4-3.8 per cent for H1FY21, with risks broadly balanced. With the revised projections, the inflation has ventured into the buffer zone of RBI’s comfort level. RBI targets inflation of 4 per cent within a band of ±2 per cent. MPC said there are several factors that warranted the revision, including high vegetable and food prices, volatile domestic markets and a slowdown in demand. Governor Shaktikanta Das also said that recent tariff hikes by telecom operators can have some impact on core inflation going ahead.

Manufacturing sentiments subdued
The central bank said according to the early results of the industrial outlook survey, overall sentiment in the manufacturing sector remained in pessimism in Q3FY20. The main reasons behind the gloom are downbeat sentiments on production, domestic and external demand, and the employment scenario. As per government data, contraction in output of eight core industries, which constitute 40 per cent of the index of industrial production (IIP), extended into the third consecutive month in November and become more pronounced.

Services activity weak
Services sector activity was subdued according to high frequency indicators tracked by RBI. On the other hand, tractors and motorcycles sales – indicators of rural demand – continued to contract but at a moderated pace, the MPC noted. Passenger vehicle sales – an indicator of urban demand – posted a slender positive growth in October after 11 months of decline backed by festive offers, the committee added.

Household spending to be flat
As per survey by RBI, consumers expect their overall spending to remain unchanged going forward largely due to an increase in prices. The central bank said inflation expectations are up 180 basis points over a 1-year horizon. Based on RBI’s consumer confidence survey, spending on non-essential items of consumption has shrunk compared to a year ago, capping the overall spending.

Liquidity surplus
Overall liquidity in the system remained in surplus in October and November 2019 despite an expansion of currency in circulation due to festival demand, the committee noted. Average daily net absorption under the LAF (liquidity adjustment facility) amounted to Rs 1,98,566 crore in October, MPC said in its observations.

Rate cut transmission 'swift'
Monetary transmission has been full and reasonably swift across various money market segments and the private corporate bond market, MPC said. Against the cumulative reduction of by 135 bps during February-October, 2019, rate transmission to various money and corporate debt market segments ranged from 137 basis points to 218 basis points, it said.

The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 44 basis points, while the WALR on outstanding rupee loans increased by 2 basis points during this period. MPC expects transmission is expected to improve going forward.

Global economy subdued
MPC said global economic activity has remained subdued since its last meeting, though some signs of resilience are becoming visible.

Unanimous decision
All members of the MPC – Chetan Ghate, Pami Dua, Ravindra H Dholakia, Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das – voted to keep the rates and stance unchanged .

Minutes of MPC meet
The minutes of the MPC’s meeting will be published by December 19, 2019. The committee will meet again during February 4-6, 2020 for this sixth meeting this financial year.
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