RBI Monetary Policy 2020-21: Repo Rate unchanged at 4%, real GDP growth for 2021 projected at -7.5%

The Reserve Bank of India announced its bi-monthly monetary policy review statement on December 4, 2020. The RBI's Monetary Policy Committee (MPC) met on December 2nd, 3rd and 4th and after reviewing the current macroeconomic and financial developments voted unanimously to keep the policy Repo Rate unchanged at 4 percent. 

The MPC also decided to continue with its accommodative stance of monetary policy as long as necessary to revive growth on a durable basis and mitigate the impact of COVID-19 and keep the inflation rate within the target. 

MPC decided to continue with accommodative stands of monetary policy as long as necessary, at least till current financial year & into next year to revive growth on a durable basis & mitigate the impact of COVID-19 while ensuring that inflation remains within target: RBI Governor https://t.co/XjbTZ58gx5

— ANI (@ANI) December 4, 2020

The Reverse Repo Rate too stands unchanged at 3.35 percent and the Marginal Standing Facility (MSF) rate and the Bank rate also remained unchanged at 4.25 percent.

RBI Bi-Monthly Monetary Policy 2020-21: Key Highlights

•Inflation is likely to remain elevated, as RBI's Monetary Policy Committee.  However, some relief can be expected in winter months from prices of perishables and bumper Kharif arrivals.

Monetary Policy Committee (MPC) was of the view that inflation is likely to remain elevated with some relief in the winter months from prices of perishables and bumper Kharif arrivals: RBI Governor Shaktikanta Das

— ANI (@ANI) December 4, 2020

•The signs of recovery are far from being broad-based and are dependent on sustained policy support.

•Efforts will be necessary to mitigate supply-side driven inflation pressures. The CPI inflation rose sharply to 7.3 percent in September and to 7.6 percent in October 2020.

•While cereal prices may continue to soften with the bumper Kharif harvest and vegetable prices may ease with the winter crop, other food prices are likely to persist at elevated levels.

•Taking all factors into consideration, the CPI inflation is projected at 6.8 percent for Q3 of FY 2020-21, 5.8 percent for Q4 of FY 2020-21 and 5.2 to 4.6 percent in H1 of FY 2021-22, with risks broadly balanced.

•The MPC will closely monitor all threats to price stability to anchor broader macroeconomic and financial stability.

•RBI's policies have resulted in the lowest weighted average cost of borrowing in 16 years. The weighted borrowing cost for the centre stands at a new low of 5.82 percent as of December 1 even with additional borrowings for state governments as against 6.88 percent during the corresponding period of last year.

Recovery in sight?

•According to data available for Q3 of FY 2020-21, the economy is recuperating faster than anticipated and more sectors are joining the multi-speed upturn, said RBI Governor Shaktikanta Das.

•The recovery in rural demand is expected to strengthen further, while urban demand is slowly picking up as unlocking continues. These positive changes are, however, clouded by the possible rise in COVID-19 infections, which may yet again prompt local containment measures. 

•However, the COVID recovery rate has crossed 94 percent and continues to rise even further and there is also considerable optimism on successes in vaccine trials, which has pulled up consumer confidence. 

•The corporate results for Q2 of FY 2020-21 indicate that demand conditions are recovering and profit margins are rising. The business assessment of manufacturing firms has also entered the expansion zone in the third quarter of FY 2020-21 after remaining in contraction in the previous two quarters. 

•While exports are on an uneven recovery, the prospects look to turn brighter with the progress on the COVID vaccines.

•Taking these factors into consideration, real GDP growth is projected at (-) 7.5 percent in 2020-21. It is projected to grow at 0.1 percent in Q3 of FY 2020-21 and by +0.7% in Q4 of FY 2020-21. Further, the real GDP is projected to be 6.5 percent in the first half of the fiscal year 2021-22 with a growth of 21.9 percent.

We are projecting GDP growth for Q3 at +0.1% and +0.7% for Q4: RBI Governor Shaktikanta Das https://t.co/EDznDqagXq

— ANI (@ANI) December 4, 2020

Background 

The RBI had kept policy rates unchanged in its last MPC meeting in October 2020. Even then, the reverse repo rate was unchanged at 3.35 percent and the repo rate at 4 percent. The MPC had also then decided to maintain its accommodative stance as long as necessary, as India continues its fight against the COVID-19 pandemic.