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RBI keeps key policy rates intact

Reserve Bank of India (RBI) under the monetary policy framework has unanimously decided to keep the repo rate unchanged at 4 per cent. Repo Rate, or repurchase rate, is the key monetary policy rate of interest at which the RBI lends short term money to banks, essentially to control credit availability, inflation, and the economic growth. This decision will maintain status quo for the near term and reduce the cost of credit for corporates and households, alike.

The reverse repo rate stands unchanged at 3.35 per cent. Reverse Repo is the rate at which banks park money with the RBI and the spread between repo rate and reverse repo rate is the income of RBI. By keeping these rates low, it is expected that funds will be made available for the recovery after the contraction of economic activity due to Covid-19 pandemic.

Governor’s Remarks

Shaktikanta Das, RBI Governor, sounded cautiously optimistic in the live streamed event on Friday morning. He stated, “After the steep decline into which the global economy plunged in the second quarter of 2020, global economic activity appears to have rebounded sequentially in the third quarter, but unevenly among and within economies. Improvement in manufacturing, labour markets and retail sales powered strong recoveries in some countries; whereas in others, a rise in new infections prompted a slower pace of unlocking or re-imposition of restrictions which, in turn, stalled the upturn.”

Positive Developments

Das remarked that, the focus should now shift from containment to revival. He added, “Kharif sowing has already surpassed last year’s acreage as well as the normal sown area. Improved soil moisture conditions, along with healthy reservoir levels, have brightened the outlook for the rabi season. Early estimates suggest that food grains production is set to cross another record in 2020-21.”

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. The services PMI for September at 49.8 remained in contraction but has risen from 41.8 in August. PMI summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting. The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors.

Shape of Recovery Curve

Economists and seasoned market participants have been suggesting various shapes of the Gross Domestic Product (GDP) recovery curve. Will it be a V, U, W or L shaped recovery is anybody’s guess. The Governor put forth a rational statement in this regard. He opined that, the recovery will be sector specific and shall have a varying pace; sectors which are contact-intensive shall be last to see green shoots.

The Governor plainly laid out the annual growth outlook for FY ’21. He said, “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. If, however, the current momentum of upturn gains ground, a faster and stronger rebound is eminently feasible.”

Image Courtesy: Reserve Bank of India

Government Borrowing for FY 2020-21

RBI has been able to manage the borrowing plans in the first half (April to September) of current fiscal for central and state governments without any hiccups. The weighted average cost of borrowings by the central government during the first half of 2020-21 at 5.82 per cent is the lowest in the last 16 years. The limit for Ways and Means Advances (WMA) for the centre has been kept higher at ₹1.25 lakh crore compared to ₹35,000 crore in H2 (October to March) of the previous year. Similarly, the 60 per cent increase in WMA limit for states in the first half of 2020-21 has been extended for a further period of 6 months till March 31, 2021.

Round the Clock RTGS from December 2020

In an attempt to promote ease of doing business, Real Time Gross Settlement (RTGS) system will be available round the clock on all days from December 2020. India will be among very few countries globally with a 24x7x365 large value real time payment system.

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