RBI’s Policy – Its Own Version Of Refined Quantitative Easing

Welcome to the 6th edition of weekly musings!

The backdrop of our musings couldn’t have been more significant – the series of unlocking measures by central and state governments in India have led to an unparalleled improvement in data points on multiple fronts. The sustained reduction in the number of new Covid-19 cases has translated into an improvement in India’s most high-frequency indicators.

India’s Oil Demand Rises to 96% of Pre-Covid Levels

India's Oil Demand Rises

Source: PPAC, Morgan Stanley, Tavaga Research

India’s electricity consumption was up 14% year on year for the week ending 23rd September; India’s ports saw a spike in container volume on a month-on-month basis; Compared to the daily average in August, the daily average registrations of passenger vehicles, goods vehicles, and properties were higher in September with new property registrations in the state of Maharashtra much higher than March 2020. The country’s civil aviation data points out that the domestic departures and the domestic traffic have more than doubled since India started its unlock phase in June 2020.

Recovery in Ports and Cargo Data in September

Recovery in Ports and Cargo Data in September

Source: Citi Research, Indian Ports Association, Tavaga Research

On the global front, the U.K. and Europe are facing the imminent threat of a second wave of Covid-19 as cases continue to surge amidst talks of further lockdowns. The uncertainty surrounding Brexit talks has led to more chaos. The Covid-19 diagnosis of US President Donald Trump has made an already bitter election year more unpleasant and nastier. In Asia’s Hong Kong, tensions have risen between the local government and the pro-democracy activists and continue to simmer.

RBI’s Monetary Policy Committee Gets 3 New Members; Forecasts India’s GDP to contract by 9.5% in FY2020-21

The newly constituted MPC of India’s central bank announced its first policy decision on 9th October with RBI governor Shaktikanta Das announcing a host of developmental and regulatory reliefs that coincides with the synchronized approach of the Indian government and the RBI to rebuild the Indian economy.

Taking into consideration the uptick in the rural economy and a weak external environment, Governor Das forecasted India’s GDP to decline by 9.5% in FY21 with a contraction of 9.8% in Q2, a 5.6% decline in Q3, and positive growth of 0.5% in Q4. However, at this point, various data points suggest that green shoots could be seen not before the first quarter of FY22.

RBI Growth & Inflation Outlook for India

CPI Inflation

Q1 FY21* Q2 FY21 Q3 FY21 Q4 FY21

Q1 FY22

Oct’20 (3rd bi-monthly)

6.6 6.8 5.4 4.5


Feb’20 (6th bi-monthly)

5.4 5 3.2

Dec’19 (5th bi-monthly)

4.0 3.8

Oct’19 (4th bi-monthly)


Real GDP Growth

Q1 FY21*

Q2 FY21

Q3 FY21

Q4 FY21

Q1 FY22

Oct’20 (3rd bi-monthly)


-9.8 -5.6 0.5


Feb’20 (6th bi-monthly)


6.0 6.2

Dec’19 (5th bi-monthly) 5.9


Oct’19 (4th bi-monthly)


Source: RBI, SBI Research; *- Actual

On expected lines, the MPC unanimously decided to maintain the status quo with respect to the repo rate and kept it unchanged at 4% with an accommodative stance. The policy stance wasn’t unanimous as one of the MPC members voted against this decision of the MPC. The reverse repo rate and the CRR too remain unchanged at 3.35% and 3%, respectively.

One of the key takeaways from the RBI Policy meet was the opening up of the facility of OMOs (Open Market Operations) in SDLs (State Development Loans). Indian states are in dire need of cheap funds as the states are facing the brunt of GST revenue shortfall. While the average borrowing cost has reduced to 6.5% in FY21 (from 7.1% in FY20), the states have already borrowed Rs 3.75 lakh crores in this FY as against Rs 2.43 lakh crores in FY 20. With the introduction of open market operations in state development loans, the spread between the G-Sec and SDLs is likely to decrease and further bolster the liquidity in SDLs.

Auto Sales Back in Focus as Passenger Vehicle Sales grow for the first time in Six months

Car retail sales are back in the positive trajectory as 195,665 units of passenger vehicles were sold in September 2020 as against 178,189 last year, thus registering a growth of 9.81% YoY.

With agriculture being the only sector to achieve positive output in the first quarter of FY21, the trend remained intact as tractor sales rose by a whopping 80% YoY as the manufacturers sold more than 68,000 units in September 2020. This growth in tractor sales was further corroborated through the growth in utilization and sale of fertilizers and consumer durables.

The two-wheeler and commercial vehicles segment, however, witnessed a drop in sales YoY with a slight improvement on a monthly basis.


September 2020

September 2019

Change YoY August 2020

Change MoM


1,016,977 1,163,918 -12.62% 898,775


Three -Wheelers

24,060 58,485 -58.86% 16,857


Commercial Vehicles

39,600 59,683 -33.65% 26,536


Passenger Vehicles

195,665 178,189 9.81% 178,513



68,564 38,008 80.39% 67,406


Total Sales

1,344,866 1,498,283 -10.24% 1,188,087


Source: AutocarIndia, Tavaga Research

India’s automobile sector, which contributes more than 7% to the nation’s GDP, can expect a further rise in the demand for its PV, two-wheeler, and the tractor segment in October and November as the festive season comes closer and as banks become more flexible for a vehicle finance.

China’s Poorer Households suffer as economy witnesses a K-Shaped Recovery

China made a solid comeback from the slowdown caused by Covid-19 as the exports continued to rise in double digits, retail sales back to pre-Covid levels, and the economy registering a growth of 3.2% in the quarter ending June 2020 (the only economy amongst the major ones to register +ve growth rate).

However, the China Household Finance Survey reveals some surprising tales about China’s households – most of the bottom 60% households (earnings of less than $14,650 a year) saw their wealth decline in H1 of 2020, while those earning more than $40,000 a year reported gains.

The major reason behind this divide is the kind of fiscal stimulus China chose to give. The Chinese ideology is such that the government believes that it can control the businesses more than the end-consumer. Therefore, instead of providing direct cash transfers and low-cost funds to its citizens, the authorities focus more on infrastructure such as building bullet trains, 5G telecom stations.

While a U-shaped, V-shaped, and W-shaped recovery has its own disadvantages, a K-shaped recovery is worse as it creates a divide amongst the citizens of the country.

Coming Up In The Week:

1. September retail inflation data – 12th October

2. August IIP (Index of Industrial Production) data – 12th October

3. China Auto Sales data – 12th October

4. China Trade data – 13th October

5. US Inflation data – 13th October

6. September wholesale inflation data – 14th October

7. US unemployment data – 15th October

Happy Investing!

Tavaga Advisory Services is the official partner for providing advisory services to TradeSmart clients
Tavaga & Trade Smart has issued this report for information purposes only. This is not an investment document.
Please refer to https://tavaga.com/terms.html for disclosures.

Leave a Reply