RBI keeps key repo rate at 4% to aid economy

MPC unanimously votes to leave the repo rate unchanged for fourth time, reverse repo at 3.35%

MUMBAI: The Reserve Bank of India (RBI) kept rates steady at record low levels as expected on Friday and said it would maintain support for the economy’s recovery from the coronavirus pandemic by ensuring ample liquidity for markets to absorb a massive government borrowing programme.

“Going forward, the Indian economy is poised to move in only one direction and that is upwards. It is our strong conviction, backed by forecasts, that in [financial year] 2021-22, we would undo the damage that Covid-19 has inflicted on the economy,” governor Shaktikanta Das said.

The central bank’s Monetary Policy Committee (MPC) voted unanimously to leave the repo rate unchanged at 4%, Das said.

“It also unanimously 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 – 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 said.

Consequently, the reverse repo rate will also continue to earn 3.35% for banks for their deposits kept with the RBI.

“The RBI clearly communicated that it doesn’t intend to yank away the liquidity carpet in a way that topples the vases of growth recovery and fiscal financing resting on it,” said Aurodeep Nandi, India economist at Nomura.

The central bank had slashed the repo rate by 115 basis points (bps) since March last year to support growth.

This is the fourth time in a row that the MPC has decided to keep the policy rate unchanged. The RBI had last revised its pol

icy rate on May 22, in an off-policy cycle to perk up demand by cutting interest rate to a historic low.

The policy statement, however, pointed to ongoing inflation concerns, as core inflation remains high. It said record pump prices of petrol and diesel were adding to worries and cited a need to create conditions that result in “durable disinflation”.

The MPC saw retail inflation running at 5.2% in the current quarter, and expected it to be between “5.2% to 5.0%” in the six months from April through September, and 4.3% for the third quarter of 2021-22, with risks broadly balanced, Das said.

“Going ahead, factors that could shape the food inflation trajectory in coming months, including the likely bumper kharif harvest arrivals in markets, rising prospects of a good rabi crop, larger winter supplies of key vegetables and softer poultry demand on fears of avian flu are all indicative of a stable near-term outlook,” he said.

With regard to growth, Das said signs of recovery have strengthened further since the last meeting of the MPC and high frequency coincident and proximate indicators suggest that the list of normalising sectors is expanding.

“Real GDP growth is projected at 10.5% in 2021-22 – in the range of 26.2% to 8.3% in H1 (first half of FY22) and 6% in Q3,” he said, a tad lower than 11% predicted by the government’s Economic Survey last week.

The outlook on growth, he said, has improved significantly with positive growth impulses becoming more broad-based and the rollout of the vaccination programme in the country auguring well for the end of the pandemic.

The economy had contracted by 23.9% in the April-June period of last year and by 7.5% in the following three months.

As far as gross market borrowing of ₹12 lakh crore in 2021-22 is concerned, the central bank chief said the Reserve Bank, as the government’s debt manager and banker, will ensure the orderly completion of the programme in a non-disruptive manner.

“In this context, we look forward to the continuance of the common understanding and cooperative approach between market players and the RBI during 2021-22 also,” he said.

The RBI has also decided to defer the implementation of the last tranche of the Capital Conservation Buffer (CCB) of 0.625% and also defer the implementation of Net Stable Funding Ratio (NSFR) by another six months from April 1 to October 1, 2021.