There was no element of surprise in the Reserve Bank of India’s bimonthly monetary policy statement released on Friday. The central bank kept key policy rates unchanged as expected, but raised the outlay for its government security acquisition programme (G-SAP) to boost economic recovery, under threat from the devastating second wave of Covid-19.
RBI Governor Shaktikanta Das said the monetary policy committee kept the repo rate unchanged at 4% and the reverse repo rate at 3.35%. He said the decision to hold rates was taken unanimously by all six members of the monetary policy committee to maintain the RBI’s accommodative monetary policy stance.
No room for MPC to tweak rates
Challenges to economic growth and rising inflation left no room for the MPC to tweak rates. The central bank has cut the repo rate by 115 basis points since March last year to support growth in the economy, ravaged by the coronavirus pandemic.
The monetary policy committee, however, has done enough to keep adequate liquidity in the system. The RBI has kept aside Rs 1.2 lakh crore ($16.44 billion) to buy bonds in the second quarter of the current financial year under G-SAP 1.0, a move that will ease pressure on domestic lending rates.
CPI inflation forecast has been raised. It is hoped that the pandemic crisis will ensure that there is no demand-driven inflation that could trigger spiralling prices. Bond yields are expected to be range-bound. But questions remain about the decision of the MPC to ignore inflationary pressures triggered by rising commodity and food prices.
Inflation vs growth dilemma
Targeting inflation has become less important for the RBI in the light of the falling economic growth rate. The Gross Domestic Product shrank 7.3% in the financial year ended March 2021. The MPC had projected 10.5% growth for the financial year in its last meeting.
The committee took into account the impact of the second wave of Covid-19 to lower growth projections for the current financial year by 100bp — from 10.5% to 9.5%. Several economists such as HDFC Bank’s Abheek Barua had recommended this step ahead of the monetary policy committee meeting.
The peaking of the Covid-19 second wave in the first quarter has brought pessimism among economists about the economic growth prospects in the current fiscal. Economists like EGROW Foundation’s Arvind Virmani see growth picking up in the second quarter. Virmani expects economic growth for the entire financial year to beat most forecasts that paint a gloomy picture.
Monetary policy statement highlights
The repo rate is kept unchanged at 4%, the reverse repo rate at 3.35%, and the marginal standing facility rate and the bank rate at 4.25%.
The monetary policy committee will continue with the accommodative stance till the economy achieves sustain growth on a durable basis.
The rate decisions are in consonance with the medium-term target for CPI inflation of 4% within a band of +/- 2%.