The Reserve Bank of India's Governor Shaktikanta Das announced RBI bi-monthly Monetary Policy review on October 9, 2020. The RBI Governor announced the decisions taken by RBI's recently constituted Monetary Policy Committee (MPC).
The Government had earlier this week appointed three eminent economists- Ashima Goyal, Jayanth R Varma and Shashanka Bhide as members of the MPC, in place of Chetan Ghate, Pami Dua, and Ravindra Dholakia whose term ended on September 29, 2020. The committee began its three-day deliberations on October 7, 2020.
The RBI Governor in address announced that the Monetary Policy Committee had decided to keep repo rates unchanged at 4 percent. The MPC has also decided to maintain an accommodative stance as long as required for growth.
The RBI Governor also announced a host of new measures to be undertaken by the central bank.
Key Announcements
• The MPC evaluated domestic and global macroeconomic and financial conditions and voted unanimously to leave the policy repo rate unchanged at 4 percent.
• It also decided to continue with the accommodative stance of monetary policy as long as necessary at least during the current financial year and into the next year to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward.
• The Marginal Standing Facility (MSF) rate and the Bank rate will remain unchanged at 4.25 per cent. The reverse repo rate will also remain unchanged at 3.35 per cent.
Global Economy
• The RBI Governor stated that after a steep decline in the second quarter of 2020, global economic activity appears to have rebounded sequentially in the third quarter, but unevenly among and within economies.
• He noted that there have been improvements in manufacturing, labour markets and retail sales powered strong recoveries in some countries, while in others rise in new infections prompted a slower pace of unlocking or reimposition of restrictions which, in turn, stalled the upturn.
• He stated that while investment has remained in retrenchment, consumption and exports have started to improve. Massive policy support across all countries has prevented a deeper downslide, providing a floor underneath employment, household incomes and businesses. Financial conditions continue to remain benign.
Indian Economy
The RBI Governor stated that the Indian economy is entering into a decisive phase in the fight against COVID-19 pandemic. Several high-frequency indicators are pointing to the easing of contractions in various sectors of the economy and the emergence of impulses of growth.
The RBI Governor assured that by all indications, the deep contractions of Q1:2020-21 are behind us and silver linings are visible in the flattening of the active caseload curve across the country.
Key Focus
The RBI Governor stated that the focus must now shift from containment to revival. Undeterred by the pandemic, the rural economy looks resilient.
Food Grains Production
RBI Governor revealed that Kharif sowing has already surpassed last year’s sown area. Further he stated that improved soil moisture conditions with healthy reservoir levels have brightened the outlook for the rabi season. The early estimates suggest that food grains production is set to cross another record in 2020-21.
Job Creation
The Job creation under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) has provided incomes and employment in rural areas. Migrant labour is returning to work in urban areas, and factories and construction activity are coming back to life.
Optimism rising
• The RBI Governor noted that the mood of the nation has shifted from fear and despair to confidence and hope. In
the September 2020 RBI survey, it was found that households expect inflation to decline modestly over the next three months, indicative of hope that supply chains are mending.
• RBI projections indicate that inflation would ease closer to the target by Q4:2020-21. Our other surveys conducted in September indicate that consumer confidence is turning upbeat on the general economic situation, employment and income. Though the current assessment of the overall business situation remains in contraction in Q2, it has moved up from a low in Q1.
• The manufacturing purchasing managers’ index (PMI) for September 2020 rose to 56.8, its highest mark since January 2012, supported by acceleration in new orders and production. These expectations are also reflected in RBI's growth projections, which suggest that GDP growth may break out of contraction and turn positive by Q4.
Shape of Recovery?
It is still not clear what the shape of recovery would look like. Will it be V, U, L, or W? There is an still an ongoing debate over it. There are also talks of a K-shaped recovery.
According to RBI Governor, modest recovery in various high-frequency indicators in September 2020 could strengthen further in the second half of 2020-21 with progressive unlocking of economic activity. It is expected that agriculture and allied activities could lead the revival by boosting rural demand.
Further, the RBI Governor noted that both private investment and exports are likely to be subdued, especially as external demand is still anaemic. For the year 2020-21 as a whole, therefore, real GDP is expected to decline by 9.5 per cent, with risks tilted to the downside.
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