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RBI says GDP growth estimates at risk: Key takeaways from money policy

MPC will continue with the accommodative stance as long as it is necessary, says RBI.

, ETMarkets.com|
Last Updated: Mar 27, 2020, 02.00 PM IST
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NEW DELHI: The Reserve Bank of India's (RBI) monetary policy committee advanced its scheduled meeting to trim key policy rate by 75 basis points to 4.40 per cent, a level not even seen during the 2008 financial crisis.

The committee also cut marginal standing facility and bank rate to 4.65 per cent, from 5.4 per cent earlier. The reverse repo rates was also reduced to 4 per cent, a cut of 90 basis points, making it unattractive for banks to park money with RBI.

“MPC [will] continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of coronavirus on the economy, while ensuring that inflation remains within the target,” said the RBI.

Below are key takeaways from seventh policy statement of FY20:

Market should continue functioning
The RBI indicated in its statement that it is in favour of continuation of the financial market. A number of brokers and market participants have called for a closure of the market due to coronavirus.

“Market participants should work with regulators like the Reserve Bank and the Securities and Exchange Board of India (SEBI) to ensure the orderly functioning of markets in their role of price discovery and financial intermediation,” the committee said.

Growth estimates at risk
The committee said the growth projection of 4.7 per cent for Q4 by the National Statistics Office remains at risk from the coronavirus impact. High frequency indicators suggest that private final consumption expenditure has been hit hardest, the central bank said.

“Anecdotal evidence suggests that several services such as trade, tourism, airlines, the hospitality sector and construction have been further adversely impacted by the pandemic. Dislocations in casual and contract labour would result in losses of activity in other sectors as well,” the MPC said.

Many other institutions have cut growth projections sharply. Moody’s said India will grow at 2.5 per cent in calendar year 2020.

Inflation to ease further
With demand dwindling due to lockdowns, the retail inflation may soften going ahead. The committee in its assessment said easing prices of onion brought inflation down in February and the Covid-19 impact may further hit prices of edible oil and pulses.

The committee also noted the plunge in international crude oil prices may bring further relief to the extent it is allowed to pass through. The government recently raised tariffs sharply on petrol and diesel after the slump in crude prices.

FPI selling hurting financial condition
The RBI noted that the massive selloff by foreign money managers has put domestic financial conditions under pressure. Not just the equity market has taken a blow due to this but in the bond market too, yields have risen on sustained FPI selling, while redemption pressures, drop in trading activity and generalised risk aversion have pushed up yields to elevated levels in commercial paper, corporate bond and other fixed income segments, the committee said.

Global economy at standstill
The committee noted that the global economic activities have come to virtual standstill as lockdowns and social distancing measures are imposed across a widening swathe of affected countries.

“The outlook is now heavily contingent upon the intensity, spread and duration of the pandemic. There is a rising probability that large parts of the global economy will slip into recession,” it said.

US dollar only safe haven
The committee said amit wealth destruction in financial markets and falling bond yields in advanced economies, only the US dollar remains a safe haven in a highly uncertain outlook. The other two safe havens, gold and yen have given way to a flight to cash.

Most sectors to see adverse effects
In its outlook, the committee said apart from the continuing resilience of agriculture and allied activities, most other sectors of the economy will be adversely impacted by the pandemic, depending upon its intensity, spread and duration.

“If Covid-19 is prolonged and supply chain disruptions get accentuated, the global slowdown could deepen, with adverse implications for India,” the committee said.

Macroeconomic risks severe
Stating that strong fiscal measures are critical to deal with the situation, the committee said macroeconomic risks, both on the demand and supply sides, brought on by the pandemic could be severe. It added the need of the hour is to do whatever is necessary to shield the domestic economy from the pandemic.

In order to mitigate the economic difficulties, the Government of India on Thursday announced a comprehensive package of Rs 1.70 lakh crore, covering cash transfers and food security, for
vulnerable sections of society, including farmers, migrant workers, urban and rural poor, differently abled persons and women.

All member vote for rate cut
All six members of the committee voted for a rate cut but there were differences in the quantum of the cut. Ravindra Dholakia, Janak Raj, Michael Debabrata Patra and Shaktikanta Das voted for a 75 bps reduction in the policy repo rate while Chetan Ghate and ami Dua voted for a 50 bps reduction in the policy repo rate.

Policy minutes
The RBI said minutes of the MPC’s meeting will be published by April 13, 2020.
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