RBI Monetary Policy: MPC Keeps Interest Rates On Hold 

India’s six-member Monetary Policy Committee kept interest rates unchanged at its first meet of the financial year, with RBI Governor Shaktikanta Das guiding towards an extended pause till the economic recovery is “well secured.” Alongside, the central bank announced Rs 1 lakh crore in government bond purchases from the secondary market to keep long term rates in check.

After the review, the committee voted unanimously to keep the repo rate unchanged at 4% for the fifth straight meet since May. The central bank that controls the reverse repo rate separately decided to keep it unchanged at 3.35%.

All of the 30 economists polled by Bloomberg expected the central bank to maintain a status quo. The policy repo rate is currently at 4%, while the reverse repo rate is at 3.35%

The committee voted to maintain an accommodative stance “as long as necessary”.

The MPC, however, did not reiterate its time-bound guidance which has assured accommodative monetary policy into the current financial year.

Growth Outlook

The MPC kept its growth outlook for FY22 unchanged at 10.5% but warned of downside risks, particularly from the second wave of Covid-19 infections.

According to the RBI:

• Rural demand remains buoyant and record agriculture production for 2020-21 bodes well for its resilience.
• Urban demand has been gaining strength on the back of normalisation of economic activity and should get a fillip with the ongoing vaccination drive.
• The fiscal stimulus from increased allocation for capex under the union budget , expanded PLI scheme and uptick in capacity utilisation should provide strong support to investment demand and exports.
• The renewed jump in Covid-19 infections in certain parts of the country and the associated localised lockdowns could dampen the demand for contact-intensive services, restrain growth impulses and prolong the return to normalcy.

Inflation Outlook

The MPC noted that the supply-side pressures on inflation could persist even as demand-side pull remains moderate.

• The bumper food grains production in 2020-21 should sustain softening of cereal prices.
• Pump prices of petroleum products have remained high. Reduction of excise duties and cesses and state level taxes could provide some relief to consumers on top of the recent easing of international crude prices. This could slow down the propagation of second round effects.

On March 31, the government notified an inflation target of 4 (+/-2)% for the next five years, keeping the band and the mid-point of the band unchanged.

More Support For Bonds

To support the debt markets, the RBI announced a new secondary market bond purchase programme. As part of this, the RBI will commit to purchase a definite amount of government securities.

Das reiterated the RBI’s commitment to keeping liquidity conditions comfortable. This, he said, would imply a level of liquidity that would keep the system “surplus.”

Surplus liquidity conditions have now persisted for at least the past year, with banks parking an average of Rs 4.9 lakh fortnightly between January and March 2021.

The RBI will, however, begin longer tenor variable rate reverse repo operations. The timing and tenor of these will be dependent on liquidity conditions. Das underlined that this should not be seen as liquidity tightening.

Economist Reactions

The policy stance has shifted from a time-based to state-based guidance, considering the evolving second wave and uncertainty over its economic fallout, said Radhika Rao, economist at DBS Bank. However, the central bank’s assurance of an accommodative policy stance will help push back against the market’s premature pricing of policy tightening moves, she said.

The standout announcement was the introduction of the formalised government bond purchase mechanism, which provides a defacto calendar for bond purchases into FY22, as a counterbalance for a heavy government borrowing pipeline, according to Rao.

The central bank has revised their growth forecasts modestly lower and inflation forecasts higher, said Siddhartha Sanyal, chief economist at Bandhan Bank.

“Despite the upward revision in their inflation forecasts, which we feel is largely due to supply-side issues, the statement clearly suggests that the accommodative monetary policy stance will be maintained in the foreseeable future,” Sanyal said. “Inherently, the MPC continues to prioritise growth over other possible goals of monetary policy.”