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RBI keeps key rates intact, maintains accommodative stance

To protect the "nascent economic" recovery, the Reserve Bank of India retained its key short-term lending rates at the third monetary policy review of FY22. The growth-oriented accommodative stance was also retained to give a push to economic activity despite high retail inflation levels.

RBI keeps key rates intact, maintains accommodative stance

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  7 Aug 2021 3:58 AM GMT

MUMBAI: To protect the "nascent economic" recovery, the Reserve Bank of India retained its key short-term lending rates at the third monetary policy review of FY22. The growth-oriented accommodative stance was also retained to give a push to economic activity despite high retail inflation levels.

RBI Governor Shaktikanta Das contended that any departure from the present pro-growth monetary policy stance might "kill the nascent and hesitant recovery" as he reiterated the RBI's priority to "promote growth within the framework of financial stability".

The Monetary Policy Committee (MPC) of the central bank unanimously voted to maintain the repo rate, or short-term lending rate, for commercial banks, at 4 per cent.

Likewise, the reverse repo rate was kept unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the bank rate at 4.25 per cent.

It was widely expected that the MPC would hold rates and the accommodative stance.

Furthermore, the RBI retained the FY22 projection for real GDP growth at 9.5 per cent on the back of receding impact of Covid second wave as well as rising vaccinations.

According to Das, the economy is recovering from the setback from the Covid's second wave. He said that accelerated vaccination drive along with buoyant exports and monetary, as well as fiscal, support has aided recovery. As per the RBI's assessment, private and government consumption, and investment, coupled with demand, are on path of recovery.

Das cited the strong external demand as opportunity for India, and short term supply side shocks as the main drivers of inflation.

In terms of the RBI's revised estimates, forecasts for FY22 raised inflation projection to 5.7 per cent from the earlier 5.1 per cent given the supply side overhang seen in the first quarter of the year.

Nevertheless, it said that the inflationary pressures are transitory against the backdrop of supply side constraints and a spurt in commodity prices.

However, India's benchmark indices closed the day's trade in the red, right after the RBI MPC resolution was released.

The two indices snapped their three days' positive momentum and witnessed profit booking, despite the RBI maintaining the policy stance as "accommodative".

The S&P BSE Sensex traded at 54,277.72, lower by 251.12 points, or 0.39 per cent, from its previous close. The Nifty50 of the National Stock Exchange traded at 16,238.20, down by 56.40 points, or 0.35 per cent, from its previous close.

"Today's policy clearly showcased the MPC's current preference for bolstering the incomplete domestic economic recovery, amidst lingering uncertainty, even though the unease generated by above-target inflation was evident in the considerable upward revision of the FY2021 inflation forecast," said ICRA's Chief Economist Aditi Nayar.

"The new benchmark 10 year G-sec yield may not acquiesce to the view that an average CPI inflation close to the upper end of the 2-6 per cent medium term target, and a fiscal deficit of nearly 7 per cent of GDP can be ignored." India Ratings and Research's Principal Economist Sunil Kumar Sinha said: "Although with the ebbing of the second Covid wave RBI has retained its GDP growth forecast for FY22 at 9.5 per cent, it has revised its FY22 retail inflation forecast to 5.7 per cent, up from earlier 5.1 per cent." "The projected inflation is closer to the upper tolerance band, but RBI believes that after peaking to 5.9 per cent in 2QFY22, it will fall to 5.3 per cent in 3QFY22 and come in at 5.8 per cent and 5.1 per cent in 4QFY22 and 1QFY23, respectively."

In addition, Singa said these projections indicate that inflationary pressure are not likely to ease anytime soon despite revival of south-west monsoon and pick-up in kharif sowing.

"On the other hand, as the Covid-related containment is easing and some high frequency data such as registration of automobiles, electricity demand or consumption, non-oil non-gold imports, consumer durable sales have shown quick rebound, the RBI believes nurturing growth has to be a priority." (IANS)

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