RBI keeps key policy interest rates unchanged to strengthen fragile economic recovery

Synopsis

The policy repo rate, or the rate at which RBI lends to banks, is kept at 4% after the six-member MPC voted unanimously in favour of a status quo, while the reverse repo rate remains at 3.35%. All the six members of the Monetary Policy Committee (MPC) voted to keep rates unchanged.

The Reserve Bank of India ( RBI ) Friday kept key policy interest rates and the accommodative monetary stance unchanged as expected to ensure a durable economic recovery but took the first step in winding down the emergency liquidity measures put in place to fight the pandemic induced slowdown.

Normalisation of extraordinary monetary policy has begun as the Governor Shaktikanta Das stopped the Government Securities Acquisition Programme aimed at containing bond yields, but he has said that it is no indication of reversal of easy monetary policy.

The comfortable liquidity situation and improved finances of the government mitigate concerns of higher borrowing to bridge the Good and Services Tax (GST) collections.

“We don't want the suddenness and surprises. We don't want to rock the boat,'' said Governor Das. The liquidity conditions need to evolve with the macro economic situation to ensure financial stability, said Das, adding that there is no need to continue with the purchase of government bonds through GSAP.

The policy repo rate, or the rate at which RBI lends to banks, is kept at 4% after the six-member MPC voted unanimously in favour of a status quo, while the reverse repo rate remains at 3.35%.

"Don't rock the boat…but swing the rudder – seems to have been the RBI's mantra,'' said Aurodeep Nandi, economist at Nomura Securities. “This meeting was less about making sudden moves in policy rates, and instead more about how to choreograph the normalisation of liquidity conditions. The announcement of a complete tapering off of the RBI's quantitative easing programme coupled with an expansion of the scope of the VRRR operations, is a clear sign that liquidity normalisation is now on the offing.''

Central banks across the globe are under pressure to roll back the extraordinary stimulus they provided at the outbreak of the pandemic last year. But economies have recovered since then, albeit unevenly. But at the same time, prices for goods and services are rising, threatening the credibility of monetary policy in its vital objective of containing inflation. While central bankers have maintained that inflation was due to supply side factors and was transitory, the tone has begun to change.

All the six members of the Monetary Policy Committee (MPC) voted to keep rates unchanged, but J.R. Varma, an external member, voted for the second straight time to end the accommodative stance, something he has said is not necessary to keep rates low but has the potential to dent the credibility of the central bank’s inflation targeting framework.

An ET poll of 24 banks, funds and financial institutions showed that the MPC would maintain status quo on rates and stance but would also evaluate inflation risks arising out of the global energy crisis and rising motor fuel prices, something that could potentially dent growth and upset India's balance of payments.

The RBI maintained the growth forecast at 9.5 percent for this fiscal and lowered the inflation forecast to 5.3 percent from 5.7 percent as farm prices have remained under control.

India's economy expanded 20.1% in the June quarter, versus 24.4% growth contraction in the corresponding quarter last year. Benchmark Indian stock indices that rose to fresh highs have come off since, although they are still within 5% of their record showing. Inflation, as measured by the Consumer Price Index, was at 5.3% in August, above the target 4 percent, but with a provision to move in a 2 percentage points band on either side.

Last week, global crude oil prices crossed $80 a barrel for the first time in three years, amid signs of widespread fuel shortfall. In the past month, Brent crude rose more than 8.5%.

The RBI did much of the policy heavy-lifting, adopting a multi-pronged strategy and moving beyond conventional policy. The menu of measures crossed the 100 mark at the peak. These included rate cuts and liquidity easing to keep funding costs low, absorb capital inflows to keep the currency stable, buy bonds to keep yields from being unanchored and ensure financial sector stability through regulatory support.

The repo rate was taken to a record low of 4%, below the GFC low of 4.75%. There were also unconventional measures by way of a lower operative rate i.e. reverse repo rate in midst of a sizeable liquidity surplus, effectively pushing weighted call money rates to way below the benchmark rate – up to 150 basis points.

But such measures pushed up inflation, making Varma question the wisdom of the prevailing policy as it was also inflating asset prices.

“Indeed, monetary accommodation appears to be stimulating asset price inflation to a greater extent than it is mitigating the distress in the economy,'' said Varma at the August policy meeting. “At the firm level, MSMEs have suffered severely, while large businesses have prospered. At the household level, the pandemic has been devastating for weaker sections of the society, while the affluent have weathered it reasonably well.''

In Video: RBI keeps policy rate unchanged 8th time in a row; maintains accommodative stance

The policy repo rate, or the rate at which RBI lends to banks, is kept at 4% after the six-member MPC voted unanimously in favour of a status quo, while the reverse repo rate remains at 3.35%. All the six members of the Monetary Policy Committee (MPC) voted to keep rates unchanged.

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