RBI bets big on status quo to spur growth

Shaktikanta Das

Reserve Bank Governor Shaktikanta Das


Keeps key rates unchanged, but raises forecast for inflation to 5.7%

Mumbai: The Reserve Bank of India (RBI) on Friday expectedly kept interest rates unchanged at a record low as it chose to support economic revival despite raising its forecast for inflation. The six-member Monetary Policy Committee (MPC) voted unanimously to retain the main repurchase (repo) rate - the key lending rate at which the central bank lends short-term funds to banks - at 4 per cent, but was split on continuing with the lower-for-longer stance.

"The MPC also decided on a 5 to 1 majority to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis," RBI Governor Shaktikanta Das said while announcing the monetary policy. This was a departure from the past when they were unanimous on the need to support growth. An accommodative stance means a rate hike is unlikely. This is the seventh time in a row that RBI has left the policy rate unchanged.

RBI had last revised its policy rate on May 22, 2020 in an off-policy cycle to perk up demand by cutting the interest rate to a historic low amid the onset of the Covid-19 pandemic. Prior to that, the MPC had cut key lending rates by 250 basis points since February 2019 to support growth.

With the ebbing of the second Covid wave, RBI retained its GDP growth forecast for the current fiscal year ending in March 2022 at 9.5 per cent, but revised its retail inflation forecast to 5.7 per cent, up from the earlier 5.1 per cent. The projected inflation being closer to the upper tolerance band implies price pressures are not likely to ease anytime soon despite the revival of monsoon and pick up in Kharif sowing. RBI saw consumer price inflation (CPI) peaking to 5.9 per cent in July-September before falling to 5.3 per cent in the next quarter and rising to 5.8 per cent in January-March.

"The supply-side drivers could be transitory while demand-pull pressures remain inert, given the slack in the economy," the Governor said on inflation. "A preemptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions."

Stating that the recovery remains uneven across sectors and needs to be supported by all policymakers, Das said RBI remains in "whatever it takes" mode, with a readiness to deploy all its policy levers - monetary, prudential or regulatory.

Das cautioned against the threat of a likely third wave of the pandemic and assured that the central bank will remain vigilant. "The need of the hour is not to drop out the guard and remain vigilant against any possibility of third-wave especially in the backdrop of rising infections in certain parts of the country."

Other measures announced include extending an on-tap Targeted Longer-Term Refinancing Operations programme, which allows banks to lend to stressed businesses, by three months to December 2021. Under TLTRO, banks can draw liquidity as per need to on-lend to needy segments. When it was announced on October 9, 2020, the on-tap TLTRO scheme covered five sectors.

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