Monetary Policy Review: Policy Rates Unchanged; GDP Growth Projected at 10.5%
STORIES, ANALYSES, EXPERT VIEWS
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) Wednesday voted unanimously to leave the policy repo rate unchanged at 4%. Governor Shaktikanta Das announced that it was also “unanimously decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.”
The marginal standing facility (MSF) rate and the bank rate remain thus, unchanged at 4.25% and the reverse repo rate stands unchanged at 3.35%.
The Governor said in the domestic economy, the focus must now be on containing the spread of the virus as well as on economic revival — consolidating the gains achieved so far and sustaining the impulses of growth in the new financial year (2021-22). “A key aspect of this strategy will be to strengthen the bedrock of macroeconomic stability that has anchored India’s revival from the pandemic. This will help stakeholders in taking efficient spending decisions over longer horizons, thereby improving the investment climate,” he said.
“Public investment in key infrastructure sectors is a force multiplier with historically proven ability to revive the broader economy by directly enhancing capital stock and productivity, and by attracting private investment,” he added.
Optimism: Governor Das said the Reserve Bank is optimistic about a pick-up in demand and expansion of business activity into financial year 2021-22.
The Governor said that the juxtaposition of high frequency lead and coincident indicators reveals that economic activity is normalising in spite of the surge in infections. “Rural demand remains buoyant and record agriculture production in 2020-21 bodes well for its resilience. Urban demand has gained traction and should get a fillip with the ongoing vaccination drive,” he said in the Governor’s statement.
“In India, we are now better prepared to meet the challenges posed by this resurgence in infections. Fiscal and monetary authorities stand ready to act in a coordinated manner to limit its spillovers to the economy at large and contain its fallout on the ongoing recovery,” he said.
GDP Growth: Taking various factors into consideration, the projection of real GDP growth for 2021-22 has been retained at 10.5% consisting of 26.2% in Q1; 8.3% in Q2; 5.4% in Q3; and 6.2% in Q4.
Inflation: The RBI Governor said that while headline inflation at 5.0% in February 2021 remained within the tolerance band, some underlying constituents were testing the upper tolerance level.
Taking into consideration various factors, RBI has revised the projection for CPI inflation to 5.0% in Q4: 2020-21; 5.2 % in Q1:2021-22; 5.2% in Q2; 4.4% in Q3; and 5.1% in Q4, with risks broadly balanced.
Longest period of stable rates likely
With policy rates unchanged and an accommodative stance, Niti Kiran (Principal Research Analyst · Business Today) writes “the Indian economy is expected to witness the lengthiest period of policy rate stability in at least 15 years. The RBI has kept the repo rate unchanged for the fifth consecutive quarter…..The policy rate retained at 4 per cent is at its lowest level in over a decade.
“The overall focus of the RBI is to make available adequate liquidity that it deems necessary for conduct of economic activity. Along with liquidity it is also striving to keep the cost of fund low by anchoring bond yields; and has indicated the scale of support to be extended towards this end.”
"The monetary policy continues to be growth centric, despite the underlying upside risks to inflation. This is so as it believes that the inflation today is short-term in nature while growth has to be protected for long term sustainability. Although the assurance of retaining the accommodative monetary policy stance to support growth reduces the likelihood of a rate hike at least in H1 FY22, it also rules out the likelihood a rate cut," a CARE Ratings report said.
Generally, financial market players and experts said RBI's decision to keep repo rate unchanged for the fifth time in a row is in line with the economic need to encourage growth.
RBI retains growth projection in 2021-22 at 10.5%,
The central bank’ decision to hold policy rates was expected. However, writes The Mint “it also retained its growth projection for our economy in 2021-22 at 10.5%, though RBI governor Shaktikanta Das did admit a rise in uncertainty over our prospects this year. As far as forecasts go, RBI made a slight shift in how it expects inflation to pan out over the next few quarters, with the headline figure for this measure still projected to stay safely under its tolerance limit of 6% this fiscal year. Taken in isolation, these numbers could have had us looking forward to a new fiscal year with a mix of relief and optimism. But they were received impassively—for good reason. Given the time lags of RBI’s data inputs, it may not have been able to take into account the riddles posed by a sudden surge of covid infections in India. Partial lockdowns have made a comeback in key industrial states over the past week and commercial activity is sure to suffer.”