RBI keeps repo rates unchanged; headline inflation to remain at elevated level
RBI on Thursday made clear to keep policy rates unchanged in its August review
Reserve Bank of India (RBI) on Thursday made clear to keep policy rates unchanged in its August review. Amid, repo rate would remain at 4 per cent and reverse repo rate at 3.35 per cent.
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Headline inflation is expected to remain at elevated level in Q2FY21, but is likely to ease during the second half of the current fiscal aided by a favourable base effect, RBI Governor Shaktikanta Das said on Thursday. The Governor said the Monetary Policy Committee (MPC) was of the view that supply chain disruptions on account of the COVID-19 pandemic persists, with implications for both food and non-food prices.
— Sakal Times (@sakaltimes) August 6, 2020
"A more favourable food inflation outlook may emerge as the bumper rabi harvest eases prices of cereals, especially if open market sales and public distribution offtake are expanded on the back of significantly higher procurement. Nonetheless, upside risks to food prices remain," Das said while delivering the decision of the MPC on monetary policy.
"The abatement of price pressure in key vegetables is delayed and remains contingent upon normalisation of supplies. Protein-based food items could also emerge as a pressure point."
Consequent to the high retail inflation, the MPC decided to retain the RBI's key short-term lending rates, but maintained its growth oriented accomodative stance. Accordingly, the repo rate, or short-term lending rate for commercial banks, was retained at 4 per cent.
Likewise, the reverse repo rate stands unchanged at 3.35 per cent. The MPC voted to maintain accommodative stance, thus opening up possibilities for more future rate cuts. It was expected that the MPC might hold rates as recent data showed that retail inflation has been at an elevated level during June.
The retail or consumer price index (CPI) stood at 6.09 per cent in June. The urban CPI stood at 5.91 per cent and rural at 6.20 per cent. As per the data, retail inflation level has reached the upper limit of the medium-term CPI inflation target of 4 per cent.
The target is set within a band of +/- 2 per cent. Besides, Das in his address pointed out that higher domestic taxes on petroleum products have resulted in elevated domestic pump prices and will impart broad-based cost push pressures going forward. "Taking into consideration all these factors, the MPC expects headline inflation to remain elevated in Q2:2020-21, but likely to ease in H2:2020-21, aided by favourable base effects," Das said.
"Given the uncertainty surrounding the inflation outlook and extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, the MPC decided to keep the policy rate on hold, while remaining watchful for a durable reduction in inflation to use available space to support the revival of the economy."
The Reserve Bank of India also extended a scheme whereby stressed MSME borrowers will become eligible for restructuring their debt, provided their accounts with lenders were classified as 'standard' as on March 1, 2020.
Accordingly, the existing loans to MSMEs classified as 'standard' will be re-structured without a downgrade in the asset classification. "A restructuring framework for MSMEs that were in default but 'standard' as on January 1, 2020 is already in place," Das said while delivering the decision of the MPC on monetary policy.
"The scheme has provided relief to a large number of MSMEs. With COVID-19 continuing to disrupt normal functioning and cash flows, the stress in the MSME sector has got accentuated, warranting further support." According to the RBI Governor, this restructuring will have to be implemented by March 31, 2021.
The Reserve Bank placed eligibility conditions such as the limit of aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower should not exceed Rs 25 crore as on March 1, 2020. Besides, the borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration.