The monetary policy committee (MPC) of the Reserve Bank of India decided to hold policy rates at 5.15 per cent on Thursday and maintained its accommodative stance.The central bank reiterated that it will continue with its stance as long as it was necessary to revive growth, while ensuring that inflation remains within the target.
In its review, the MPC noted that even though several parameters indicate improvement in economic activity, the outlook remains subdued.Here are key takeaways from the first MPC meet of 2020:FY21 GDP projection at 6%The committee pegged India to grow at the rate of 6 per cent in financial year 2021.
The GDP may grow in the range of 5.5-6.0 per cent in the first half and 6.2 per cent in Q3FY21.
The committee said the rationalisation of personal income-tax rates in Budget 2020-21 should support domestic demand along with measures to boost rural and infrastructure spending.Space for future actionThe MPC recognised that there is policy space available for future action, but it will be dictated by the path of inflation and any change in the economic parameters.
Economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner.
Given the evolving growth-inflation dynamics, it was appropriate to maintain the status quo, the committee observed.Coronavirus impactThe MPC in its outlook said the rapid spread of the coronavirus that has already taken over 500 lives may hit Indias gross domestic product (GDP).
The committee said the virus may impact tourist arrivals and global trade.Inflation projections shoot upThe committee revised CPI inflation projection upwards to 6.5 per cent for the current quarter and 5.45 per cent for the first half of FY21.
It also revised the projection for the third quarter of FY21 to 3.2 per cent, with risks broadly balanced.The MPC noted that inflation is likely to be tempered by hardening of prices of other food items, notably those of pulses and proteins, despite an easing onion prices.
Going forward, the trajectory of inflation excluding food and fuel needs to be carefully monitored as the pass-through of remaining revisions in mobile phone charges, the increase in prices of drugs and the impact of new emission norms play out and feed into inflation formation, it added.Rural income likely to growThe central bank said rural income will grow supported by the recent rise in food prices that has shifted the terms of trade in favour of agriculture.
Similarly, private consumption, particularly in rural areas, is expected to recover on the back of improved rabi prospects, the bank added.Small saving schemes rate tweak neededThe MPC in a passing reference said that there is a need for adjustment in interest rates on small saving schemes.
During the current quarter, the government refrained from cutting interest rates on small savings schemes, including Public Provident Fund (PPF) and National Savings Certificate (NSC), despite moderating bank deposit rates.Department of Economic Affairs Secretary Atanu Chakraborty in a recent interview hinted at revision in small savings rate next quarter, in line with market rate.People inflation expectations easeHouseholds inflation expectations eased in January round of the Reserve Banks survey, the MPC said in a statement.
Three-month ahead and one-year ahead inflation expectations fell 60 basis points (bps) and 70 bps, respectively.
This comes after a sharp pick-up in the previous round.December 2019 round of the Reserve Banks industrial outlook survey suggested that the input and output prices of manufacturing firms remained subdued in Q3FY20 and are likely to remain so in the current quarter as well.Rabi sowing higherRabi sowing has been 9.5 per cent higher up to January 31 compared with a year ago.
Based on the first advance estimates, horticulture production is estimated to have risen 0.8 per cent to a record level in 2019-20.
Similarly, production of vegetables is estimated to have increased 2.6 per cent in 2019-20 due to higher production of onions, potatoes and tomatoes, the committee noted.High frequency indicators turn upThe committee said several high frequency indicators of services have turned upwards in the recent period, pointing to a modest revival in momentum.
Though, it added that the outlook was still muted.Tractor sales grew 2.4 per cent in December, while domestic air passenger traffic an indicator of urban demand posted double digit growth in November, followed by a modest growth in December.
Growth in three-wheeler sales and railway freight traffic has accelerated, while port traffic turned around in December.
The PMI services index improved to 55.5 in January 2020 from 52.7 in November 2019, boosted by a rise in new business and output.Unanimous decisionThe decision to hold rates was unanimous.
All six members of the committee Chetan Ghate, Pami Dua, Ravindra H Dholakia, Janak Raj, Michael Debabrata Patra and Shaktikanta Das voted in favour of the decision.
The minutes of the MPCs meeting will be published on February 20.
The next meeting of the MPC is scheduled during March 31-April 3.