RBI December Monetary Policy: Central bank leaves repo rate unchanged at 4%

The repo rate is the rate at which the central bank of the country lends funds to the commercial banks. The commercial banks borrow funds only if they witness a shortfall in their funds. The monetary policy committee of a country uses the reverse repo rate as a tool to control the money supply in the country.

The announcement is in line with the Street's expectations as it was expecting a status quo by the central bank this time. A CNBC-TV18 poll showed 100 percent of the market participants expected a status quo policy.

The MSF rate has also been left unchanged at 4.25 percent.

The MPC feels inflation is likely to remain elevated with some relief from the Kharif harvest, said governor Shaktikanta Das, adding that the proactive supply management can reduce food prices.

Efforts are needed to mitigate supply-side led inflation, he said. The central bank expects some relief in CPI inflation in the winter months.

RBI's CPI inflation forecast for Q3 stands at 6.8 percent and 5.8 percent for Q4. In the last policy, the RBI had projected H2 CPI inflation at 5.4-4.5 percent.

The central bank has projected FY21 real GDP contraction at 7.5 percent as against an expectation of 9.5 percent contraction earlier. RBI sees Q4FY21 GDP at +0.7 percent versus +0.5 percent earlier. The Q3FY21 GDP growth is projected at 0.1 percent.

According to Das, signs of recovery are far from being broad-based and therefore policy support was required. MPC hence accordingly decided to maintain the status quo on policy rates.

He, however, said near-term financial stability risks have been contained.

Going forward, the aim is to attempt to quickly recoup output losses, said Das.

"​RBI's role as debt manager and banker to govt was tested to the hilt in 2020...We need to be competitive and not combative," the guv stated.

According to Das, corporate bond spreads have narrowed to pre-COVID levels and overall bond market conditions have evolved in an orderly manner.

"RBI stands ready to undertake further measures as necessary to ensure easy market conditions," said Das.

Among other important announcements, Das said commercial & co-operative banks will retain profits earned in FY20 and not make any dividend payouts in FY21. It will release a discussion paper on a scale-based supervisory model for NBFCs before Jan 15, 2021.