The Reserve Bank of India (RBI) on Friday kept rates unchanged at record low levels, for the fourth straight time, and reiterated it will continue to support the recovering economy by ensuring ample liquidity in the banking system. The repo rate or RBI’s key lending rate was held at 4% while the reverse repo rate or its borrowing rate was left unchanged at 3.35%.
While announcing the decisions taken by the central bank’s Monetary Policy Committee (MPC), RBI governor Shaktikanta Das said MPC unanimously voted for keeping the interest rate unchanged and decided to continue with its accommodative stance to support growth. “MPC has also decided to continue with an accommodative stance of monetary policy as long as necessary, at least through the current financial year and into the next year to revive growth on a durable basis and mitigate the impact of Covid-19,” Das said.
RBI has cut its repo rate by a total 115 basis points since March 2020 to cushion the shock from the coronavirus pandemic, following a 135 bps reduction since the beginning of 2019. RBI had last revised its policy rate on May 22 in an off-policy cycle to perk up demand by cutting interest rate to a historic low.
After the central bank kept key rates steady, the Nifty 50 index was largely unchanged and the S&P BSE Sensex was up 0.59%. The rupee strengthened to 72.95 against the dollar, while the benchmark 10-year bond yield was at 6.09%. Before that, domestic shares hit all-time highs earlier in the day. The NSE Nifty 50 index rose 0.74% to 15,005.95 and the S&P BSE Sensex was up 0.7% at 50,979.82. Both the indexes scaled record highs early on Friday.
MPC’s 27th meeting with three external members — Ashima Goyal, Jayanth R Varma and Shashanka Bhide — began on February 3. This is the first meeting of the panel after Union finance minister Nirmala Sitharaman in her Budget 2021-22 projected a nominal GDP growth rate of 14.5% and a fiscal deficit of 6.8% cent for the financial year beginning April 1.
The government moved the interest rate-setting role from the RBI governor to the six-member MPC in 2016. Half of the panel, headed by the governor, is made up of external independent members. MPC has been given the mandate to maintain annual inflation at 4% until March 31, 2021, with an upper tolerance of 6% and a lower tolerance of 2%.
Das said the economy’s growth outlook had improved and that inflation was expected to remain within the RBI’s targeted range over the next few quarters. He also said the recent budget proposals and expenditure plans have raised hopes for a more robust recovery, and the bank stood ready to offer support and also ensure that the government’s heavy borrowing program was absorbed smoothly by the market.
Das, in line with the Union Budget, projected a GDP growth rate of 10.5% for the financial year beginning April 1, on the back of a recovery in economic activities. He also said vegetable prices are expected to remain soft in the near term as the central bank projected the retail inflation rate to come down to 5.2% in the current quarter and decline to 4.3% by the third quarter of the next fiscal. The government will be reviewing the inflation target by March-end, he said.
The RBI governor said the growth outlook has improved significantly and the vaccination drive will help the economic rebound. He added that the economy will rebound to 10.5% in the next financial year.
“Indian economy is poised to move only in one direction that is upward; to see the undoing of damage done by Covid-19 in FY22,” he said.
