RBI says GDP to turn positive from Q3, to close year at -7.5 pc

Repo rate at 4 pc, reverse repo at 3.35 retained

MUMBAI/December 04-2020: Leaving the benchmark interest rate, repo, unchanged at 4 per cent and endorsing the continuation of an accommodative stance by the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) were along the lines of what was generally predicted by the market.

But the biggest takeaway and highlight of Friday’s (December 4) announcement by the RBI could be the announcement of the revised expectation on GDP, which is set to register a growth from the third quarter (Q3) onwards, and that the financial year could draw a close with the economy posting a lesser contraction of 7.5 per cent against RBI’s October prediction of 9.5 per cent decline in the gross domestic product.

As the spectre of a higher inflation looms large, the Reserve Bank of India (RBI) on Friday decided to leave the benchmark interest rate unchanged at 4 per cent and maintain an accommodative stance, signalling more rate cuts in the future to support the economy that being pummelled  by the COVID-19 pandemic.

Announcing the key decisions taken by the MPC, the RBI Governor Shaktikanta Das (seen in the picture) said the reverse repo rate will also continue to stay at 3.35 per cent, the rate at which the banks park their funds with RBI.

The repo-reverse repo rates pair has been last set on May 22 at a historic low, breaking the policy meeting cycle, as a call to give a leg-up to the economy that has been negatively impacted by the COVID 19.

The central bank had slashed the repo rate by 115 basis points cumulatively since late March meeting to support growth. Friday’s announcement is the culmination of the meeting of the rate-setting MPC that started on December 2 with three external members — Ashima Goyal, Jayanth R Varma and Shashanka Bhide.

Positive growth from Q3

Reserve Bank of India (RBI) on Friday said it expects the economy to record positive growth in the second half of the current financial year. The economy contracted by 23.9 per cent in the first quarter and 7.5 per cent in the second quarter on account of the COVID-19 pandemic.

“The second half is expected to show some positive growth,” RBI Governor Shaktikanta Das said, adding that during the financial year as a whole, the economy was likely to contract by 7.5 per cent, which is an improvement over its previous projection of 9.5 per cent contraction.

In October, the RBI had projected the contraction in gross domestic product (GDP) to be at 9.5 per cent.

0.1 pc expansion in Q3

The RBI Governor said the GDP is expected to turn positive in the third quarter (Q3) and expand at 0.1 per cent and by the last quarter (Q4), the GDP is likely to expand by 0.7 per cent, thus ending the second half in a clear positive growth.

Hence, the growth in second half of the fiscal is expected to show positive growth.

In its October monetary policy statement, RBI had said the real GDP growth in 2020-21 is expected to be negative at (-) 9.5 per cent, with risks tilted to the downside (-) 9.8 per cent in Q2 2020-21; (-) 5.6 per cent in Q3; and 0.5 per cent in Q4.

Tightening on NBFCs

Concerned by the repeated failures among reputed NBFCs, the Reserve Bank on Friday announced a raft of measures to keep them on a tight leash so as to ensure that the governance standards are strictly followed, and also to fool-proof their risk management and internal controls.

The Governor Shaktikanta Das said the first tightening measure is on the regulatory regime for the non-banking financial companies (NBFCs), which currently are built on the principle of proportionality.

“This regulatory regime based on the principle of proportionality warrants a review. It is felt that a scale-based regulatory approach linked to the systemic risk contribution of NBFCs could be the way forward,” Das said.

Discussion paper soon

The governor also said as part of the stakeholder consultation process, a discussion paper on this will be issued before January 15, 2021, for public comments.

Das called upon the financial sector entities to give the highest priority to quality of governance, risk management and internal controls as these are the first line of defence in matters relating to financial sector stability.

The governor said a review of the way NBFCs are functioning is needed because of their growing significance and rising inter-linkages with other segments in the financial system of the country.

“This has made it imperative to enhance the resilience of NBFCs by putting in place a transparent criteria according to a matrix of parameters for declaring dividends by different categories of NBFCs”, the regulator said.

He said a draft circular on the proposed criteria and parameters will be released shortly for public comments. On the supervisory side measures, RBI said large NBFCs and urban cooperative banks (UCBs) will have to submit a risk-based internal audit.

“A set of harmonised guidelines for appointing statutory auditors for commercial banks, urban cooperative banks (UCBs) and NBFCs with a view to improving the quality of financial reporting will be finalised soon,” the RBI said.

 

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