Tapering Covid: RBI retains rates accommodative stance

Source :IANS
Author :IANS
Last Updated: Fri, Jun 4th, 2021, 22:40:50hrs
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Mumbai, June 4 (IANS) The Reserve Bank of India has retained its key short-term lending rates, along with the growth-oriented accommodative stance, at the second monetary policy review of FY22 on Friday.

The Monetary Policy Committee (MPC) of the central bank 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.

"The MPC also decided unanimously to continue with the accommodative stance as long as necessary to revive and 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," RBI Governor Shaktikanta Das said in his post policy statement.

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

"On balance, the MPC was of the view that at this juncture, policy support from all sides is required to regain the momentum of growth that was evident in H2:2020- 21 and to nurture the recovery after it has taken root," Das said.

"Accordingly, the MPC decided to keep the policy rate at its current level of 4 per cent and to continue with the accommodative stance as long as necessary to revive and 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."

As India suffered from a massive spike in Covid-19 infections, the situation had forced state governments to implement local lockdowns and travel restrictions which have started to slowdown economic activity.

Accordingly, the RBI revised India's FY22 growth estimates to 9.5 per cent from 10.5 per cent.

It pointed out that expected healthy rural demand on the back of a normal monsoon and pick up in exports should act as a tailwind for the country's growth.

Besides, Das said vaccination process should help to normalise economic activity.

The RBI also called upon the Centre to give a policy push for exports.

"The need of the hour is for enhanced and targeted policy support for exports. It is opportune now to give further policy push by focusing on quality and scalability," the Governor said in his post policy statement.

Additionally, the central bank pegged retail inflation for FY22 CPI-based inflation at 5.1 per cent.

The announcements, though, largely factored in by investors, evoked a lukewarm response in the stock market.

Eventually, the key indices closed in the red on account of profit booking.

The S&P BSE Sensex closed at 52,100.05, lower by 132.38 points, or 0.25 per cent, from its previous close.

On the other hand, the Nifty50 of the National Stock Exchange traded at 15,670.25, up by just 20.10 points, or 0.13 per cent, from its previous close.

"Given the speed, scale and severity of the second wave of Covid-19, the ongoing economic recovery has indeed been impacted. However, similar to Ind-Ra's view, even RBI believes that despite second wave, the economic activities are unlikely to be severely impacted because restrictions or lockdowns has been regional and nuanced," India Ratings & Research's Principal Economist Sunil Kumar Sinha said.

"Also, people and businesses are adapting to pandemic working conditions. Thus, the RBI has scaled down its GDP growth forecast for FY22 to 9.5 per cent from earlier 10.5 per cent. Inflation outlook of RBI amidst the expected bumper food grain production and rising global commodity prices appears to be more evenly balanced."

ICRA Chief Economist Aditi Nayar said: "The MPC is firmly focussed on nurturing a durable revival in growth and we anticipate that it will demonstrate a high tolerance for the average CPI inflation to range between 5-6 per cent during the recovery period."

"While the MPC's real GDP growth projection of 9.5 per cent is in line with the upper end of our own forecast range of 8-9.5 per cent, we believe that accelerated vaccine availability, resulting in a back-ended surge in domestic demand, is central to this outcome."

Acuite Ratings & Research Chief Analytical Officer Suman Chowdhury said: "The central bank has taken note of the upside risks to inflation in a scenario of higher commodity prices and re-emergence of higher supply constraints amidst the current phase of lockdowns but continues to project benign inflationary figures for the next few quarters albeit at slightly higher levels of 10-20 bps as compared to the previous forecasts."

"In a way, this confirms our expectation that bringing back the growth impulses witnessed particularly in Q4FY21 is the primary focus of monetary policy over the near to medium term."

Emkay Lead Economist Madhavi Arora said: "The MPC expectedly stayed on hold and emphasised its commitment to keeping policy accommodative and maintaining ample liquidity as long as necessary. This more state-led guidance hinges on growth revival becoming durable."

"The 100 bps downgraded FY22 growth forecast to 9.5 per cent was accompanied with acknowledgment of rising uncertainty amidst Covid second wave, while inflation is seen at 5.1 per cent for FY22, broadly same as last policy."



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