RBI holds repo rate, says positive growth ahead
The MPC sees inflation in the current quarter at 6.8% before cooling slightly to 5.8% in the Jan-March quarter
MUMBAI: Reserve Bank of India (RBI) on Friday left interest rates unchanged for the third straight time amid persistently high inflation, but said it will ensure ample liquidity is provided to stressed sectors to keep a nascent economic recovery on track, while also saying that the economy was recuperating fast and would return to positive growth in the current quarter itself.
The six-member Monetary
Policy Committee (MPC) unanimously decided to keep the benchmark repo rate — the rate at which RBI lends to commercial banks — at 4%. Since January, RBI has reduced that rate by 115 basis points before hitting the pause button in August on concerns on inflation.
The reverse repo rate, or the rate at which banks lend to the central bank, was kept unchanged at 3.35%.
The MPC “decided to continue with the accommodative stance of monetary policy as long as necessary — at least through the current financial year and into the next year,” RBI governor Shaktikanta Das said.
The central bank’s stance is “to revive growth on a durable basis, and mitigate the impact of Covid-19 while ensuring that inflation remains within the target going forward,” he added.
Das said inflation continues to be sticky.
Consumer-price growth or the headline CPI inflation, at 7.6% in October, was well above the upper end of the RBI’s 2-6% target band and it expected the outlook for inflation to worsen.
Gross domestic product in the July-September quarter contracted 7.5% on-year, after a decline of 23.9% in the previous three months. The latest decline was more moderate than expected.
MUMBAI: The Reserve Bank of India (RBI) kept its key interest rates steady as widely expected on Friday amid persistently high inflation but said it will ensure ample liquidity is provided to stressed sectors to keep a nascent economic recovery on track.
Its monetary policy committee (MPC) decided to retain an accommodative policy stance at least for the current financial year and into the next to revive growth on a durable basis, while ensuring that inflation remains within target, governor Shaktikanta Das said in an online briefing.
Das said MPC members voted unanimously to hold rates and retain the stance. The key lending rate of the RBI or the repo rate was left unchanged at 4% while the reverse repo rate or the key borrowing rate stayed at 3.35%. “The MPC is of the view that inflation is likely to remain elevated, barring transient relief in the winter months from prices of perishables,” Das said.
“This constrains monetary policy at the current juncture from using the space available to act in support of growth.”
Das announced measures to help improve access to funding for stressed sectors and said the RBI will take further steps when necessary to ensure ample rupee liquidity to sustain visible growth impulses, without impacting inflation.
“Inflation targeting is uppermost in our agenda,” Das said in a post policy news conference.
The MPC sees inflation in the current quarter at 6.8% before cooling slightly to 5.8% in the Jan-March quarter. The October projections for H2 FY21 were for inflation between 5.4%-4.5%.
“We believe that improving signs of growth normalisation and elevated inflation in the near term suggest no additional scope for rate cuts,” said Garima Kapoor, economist with Elara Capital.
The central bank has slashed the repo rate by 115 basis points (bps) since late March to cushion the shock from the coronavirus crisis and sweeping lockdowns to check its spread.
However, inflation has remained consistently above the upper end of the RBI’s mandated 2-6% target range every month barring March this year, with core inflation also remaining sticky. “If supply side management is timely and effective, you will see the trajectory of inflation completely changing,” deputy governor Michael Patra said, adding that the inflation projections provided are based on how things stand today.
Analysts polled by last month forecast India would emerge from recession early in 2021 but it is not expected to return to pre-pandemic levels any time soon.
“An accommodative liquidity stance will ensure access to liquidity will not be a challenge and the ongoing recovery continues to gather steam,” said Ashish Shanker, head Of investment at Motilal Oswal Private Wealth Management.
Retail inflation pegged at 6.8% in third quarter
The RBI said retail inflation is likely to remain elevated and pegged it at 6.8% for the third quarter of the current fiscal.
CPI inflation rose sharply to 7.3% in September and further to 7.6% in October, Das said while unveiling its bi-monthly monetary policy review.
With some evidence that price pressures are spreading, the outlook for inflation has turned adverse in relation to expectation in the last two months, Das said. “While cereal prices may continue to soften with the bumper kharif harvest arrivals and vegetable prices may ease with winter crop, other food prices are likely to persist at elevated levels. Cost push pressures continue to impinge on core inflation which could remain sticky. Taking into consideration all these factors, the CPI inflation is projected at 6.8% for Q3 FY2020-21; 5.8% for Q4 FY2020-21 and 5.2-4.6% in H1 of FY2021-22 with risks broadly balanced,” Das added.