MPC opts for status quo on rates; growth focus stays

Accommodative stance, liquidity mop-up to continue

With the emergence of the omicron variant threatening the fragile domestic economic recovery, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Wednesday decided to keep unchanged the key rates and its accommodative stance in the bi-monthly monetary policy. This is the ninth consecutive time that the six-member rate setting panel i.e the MPC maintained a status quo on rates.

RBI governor Shaktikanta Das said, “Overall, the recovery that had been interrupted by the second wave of the pandemic is regaining traction, but it is not yet strong enough to be self-sustaining and durable. This underscores the vital importance of continued policy support.”

The repo rate is the rate at which the RBI lends money to banks against government securities and has been slashed by a total of 115 basis points (bps) since March 2020. It currently stands at a historic low of 4 per cent.

A status quo on repo rate means that interest rates on home, auto and personal loans will continue to remain low for some more time. The reverse repo remained unchanged at 3.35 per cent,

Marginal standing facility (MSF) and bank rate too have remained unchanged, at 4.25 per cent.

The MPC voted with a 5:1 majority to maintain an

accommodative stance but outlined plans to drain surplus liquidity in the banking system, raising the chances of a hike in key borrowing rate early next year.

The RBI will continue to use variable rate reverse repo operations (VRRR) to absorb funds. It will conduct a VRRR auction of Rs 6.5 lakh crore in midDecember and Rs 7.5 lakh crore at the end of the month.

14-day VRRRs will continue to be complemented by longer-term 28-day VRRR auctions. “Liquidity absorption will be undertaken mainly through the auction route from January 2022 onwards,” said the RBI.

“Some latent monetary policy normalisation

could continue, with the RBI planning to drain more liquidity via variable rate reverse repo auctions. We think growth recovery has gotten stronger and core inflation will remain elevated; we think the policy corridor will be narrowed over February and April, and repo rate hikes will follow in mid-2022,” said Pranjul Bhandari, chief India economist at HSBC.

The RBI retained its projection of real GDP growth for FY22 at 9.5 per cent consisting of 6.6 per cent in Q3 (earlier: 6.8 per cent) and 6 per cent in Q4 (earlier: 6.1 per cent) as well as CPI inflation forecast at 5.3 per cent for FY22 with 5.1 per cent in Q3 (earlier: 4.5 per cent); and 5.7 per cent (earlier: 5.8 per cent) in Q4

FY22. CPI inflation for Q1 & Q2 FY23 is projected at 5 per cent.

“The prospects of economic activity are steadily improving. Given the slack in private consumption, continued support is required for a durable recovery," Das said. "Crude oil prices softening in November would alleviate domestic cost-push buildup. The recent reduction in taxes on petrol, diesel prices should support consumption demand," he added.

“The persistence of CPI inflation excluding food & fuel since June 2020 is an area of policy concern in view of input cost pressures that could rapidly be transmitted to retail inflation as demand strengthens,” the governor said.