RBI Monetary Policy - December 2021
Even before the RBI announced the Monetary Policy on 08-December, the consensus of leading economists had hinted at a status quo. It is not that the RBI did not have reasons to turn hawkish. Inflation was higher, growth was picking up and Fed was turning incredibly hawkish. What finally tipped the scales in favour of a status quo policy was the spate of uncertainty in the global markets.
There was a combination of the Omicron virus uncertainty and the uncertainty over the Evergrande crisis in China. The best option for the Monetary Policy Committee of the RBI was to buy time till there was greater clarity.
Before the RBI can commit itself to a position, it will need greater clarity on trajectory of inflation in India, the likely intensity and impact of the Omicron variant and whether the Fed really turns hawkish on 15th December. That was the underlying leit motif of the Monetary Policy on 08th December.
What exactly did the monetary policy announcement say
A) Repo rate (RBI lending rate to banks) stays put at 4%. Due to the Omicron variant, RBI is not taking chances and would prefer to keep rates low till durable growth was visible.
B) Interestingly, the RBI did not yield to the easier option of hiking reverse repo rates from the 3.35%. After all, VRRRs had effectively raised yields in the market.
C) The bank rate and MSF rate, pegged at a 25 bps spread above repo rates, also stayed put at 4.25% to keep lending rates in check.
D) The debate was over the accommodative monetary stance. However, with the global state of flux, the RBI has preferred to even err on the side of caution.
E) RBI estimates of GDP growth for FY22 were static at 9.5%. while Q2 GDP exceeded RBI estimates by 50 bps, RBI has lowered Q3 and Q4 GDP estimates due to Omicron risks.
F) Retail inflation target for FY22 has also been held by the RBI at 5.3%. The marginally higher CPI inflation in Oct-21 is expected to be tempered by winter Rabi arrivals.
G) All 6 MPC members unanimously voted to hold repo rates at 4%. However, Jayanth Varma had a dissent note on a blanket assurance on accommodative policy.
Development measures announced by the RBI
a) Going ahead, banks that meet regulatory capital requirements can infuse capital into overseas branches and subsidiaries as well as decide on retention or repatriation of profits on their own with the prior approval of the board of directors.
b) A discussion paper on prudential norms for investment portfolio of banks will be presented to make it more current since the last change in 2000. RBI also expanded the ceiling by 50 bps to urge borrowers to shift from LIBOR to a formula based ARR pricing.
c) RBI has also laid out plans for a dedicated UPI product for feature phone users, who number over 44 crore currently to bring them in the UPI ecosystem. Also, the small UPI transactions will be enabled via on-device wallet and the upper limit for UPI transactions will be hiked from Rs2 lakhs to Rs5 lakhs.
Actually, the RBI is on the horns of a dilemma. It has repeatedly expressed concerns over the liquidity glut in the market but has been compelled to maintain an accommodative monetary stance. Data flows in the coming months could bring about a sharp change in RBI stance.
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