RBI credit policy: What Governor did not mention, or referred to just in passing | HDFC Securities view

RBI credit policy: The outcome of the MPC meet on Dec 04 was largely on expected lines including the status quo on rates. The Committee's assurance to continue with the accommodative stance of monetary policy as long as necessary, for the current and next year is welcome. The MPC feels that inflation is likely to remain elevated, with some relief in the winter months from prices of perishables and bumper kharif arrivals and has raised inflation projections for H2 FY21 and H1 FY22. The fact that as per the RBI, CPI may not fall materially even in H1 FY22 is a bit worrying.

The Governor did not mention asset quality issues or their trends. In the passing he mentioned that debt servicing capacities of corporates has risen in Q2 FY21 meaning that the RBI does not perceive any deterioration in asset quality from the last policy review.
 
The real GDP growth projections have been upped. While the Q4 growth projection is below expectations, the H1 FY22 projections bring in a sense of relief.
 
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No measures have been announced to mop up the excess liquidity in the Banking system which has arisen because of high inflation and Forex sterilization. On the other hand, the RBI has assured provision of adequate liquidity to deserving segments. The real interest rate on the short end of the curve will remain severely in the negative for some time penalizing the savers. One hopes that this does not affect the savings rate materially.
 
All in all a welcome policy announcement with RBI maintaining the liquidity rope and hinting/hoping that asset quality stress seems under control.   It seems that rates may remain on hold at least till Mid March 2021.