ICICI Securities - Monetary Policy Update - October 2020: Status quo, resolve to support growth rises...

- The recovery in the rural economy is expected to strengthen further, while the turnaround in urban demand is likely to be lagged in view of social distancing norms and elevated number of Covid-19 infections. Both private investment and exports are likely to be subdued, especially as external demand is still anaemic. Taking into consideration above factors and uncertain Covid-19 trajectory, real GDP growth in 2020-21 is expected to be negative at -9.5%, with risks tilted to the downside: -9.8% in Q2:2020-21; -5.6% in Q3; and 0.5% in Q4. Real GDP growth for Q1:2021-22 has been placed at 20.6%

- CPI inflation is projected at 6.8% for Q2:2020-21, 5.4-4.5% for H2:2020-21 and 4.3% for Q1:2021-22, with risks broadly balanced

- The MPC is of the view that the revival of the economy from an unprecedented Covid-19 pandemic assumes highest priority in the conduct of monetary policy. While inflation has been above the tolerance band for several months, the MPC judges that the underlying factors are essentially supply shocks, which should dissipate over the ensuing months as the economy unlocks, supply chains are restored and activity normalises. Accordingly, they can be looked through at this juncture while setting the stance of monetary policy. Taking into account all these factors, the MPC has decided to maintain status quo on the policy rate in this meeting and awaits easing of inflationary pressures to use the space available for supporting growth further

- The transmission of policy repo rate changes to deposit and lending rates of banks improved since the April 2020 MPR. The weighted average lending rate (WALR) on fresh rupee loans declined 91 bps since March 2020 in response to reduction of 115 bps in the policy repo rate and comfortable liquidity conditions

- The market expectation going into the policy was of a non-event with no rate cut expectation. While there was no rate cut as expected, the explicit priority on reviving growth and ignoring current high inflation along with a slew of liquidity and outright bond purchase announcement cheered bond markets. The benchmark 10 year G-Sec yield rallied around 10 bps after the policy announcement at around 5.93% levels

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_RBIAction_Oct20.pdf

Source : Equity Bulls

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