RBI holds rates amid split in MPC over policy stance
The central bank on Friday kept interest rates on hold for the seventh straight time to support the economy reeling from the pandemic even as a split appeared among monetary panel members over retaining the easy-money policy amid an inflation surge
The central bank on Friday kept interest rates on hold for the seventh straight time to support the economy reeling from the pandemic even as a split appeared among monetary panel members over retaining the easy-money policy amid an inflation surge.
The monetary policy committee (MPC) kept the repo rate, or the rate at which banks borrow from the Reserve Bank of India (RBI), unchanged at 4%. The MPC members voted 5-1 to continue with the accommodative policy stance as long as necessary to revive and sustain growth on a durable basis. Only Jayant Varma expressed reservations on the policy stance, the details of which will be clear once the minutes of the meeting are published.
“At this stage, therefore, continued policy support from all sides—fiscal, monetary and sectoral—is required to nurture the nascent and hesitant recovery. The MPC continues to be conscious of its mandate of anchoring inflation expectations as soon as the prospects for strong and sustainable growth are assured,” RBI governor Shaktikanta Das said in a statement.
As expected, RBI raised the inflation forecast for this fiscal to an average of 5.7%, higher than the earlier forecast of 5.1%. RBI noted that the current inflationary trend can be looked through as it is driven by “exogenous and largely temporary supply shocks”.
Explaining RBI’s stance, deputy governor Michael Patra said the central bank is looking to spread disinflation over a period of 2-3 years. RBI’s inflation projection, which stood at 6.2% during the pandemic year, has currently eased to 5.7% after a year, and will gradually touch 4%. “The approach to inflation is not a cold turkey method, where you slam the economy until it goes limp,” Patra said. “It is important to bring that down over time and not immediately.”
Despite the spike in inflation, growth continues to be a priority for the central bank. RBI retained the growth forecast for this fiscal at 9.5% amid fears of a third wave of the pandemic. Das noted that domestic economic activity has started normalizing, with the ebbing of the second wave and the phased reopening of the economy. He said recovery remains uneven and needs to be supported by policymakers.
Although RBI retained its policy stance, it raised the amount of variable rate reverse repo (VRRR) auctions by ₹2 trillion to drain excess liquidity from the banking system. Das, however, cautioned that the step is not a reversal of its policy stance.
Das warned “these enhanced VRRR auctions should not be misread as a reversal of the accommodative policy stance as the amount absorbed after the fixed rate reverse repo is expected to remain more than ₹4 trillion at end September,” Das said.
RBI also announced other liquidity measures, including conducting two more auctions worth ₹50,000 crore in August under the government security acquisition programme (G-SAP 2.0) and also extended the on-tap targeted longer-term refinancing operations programme by three months.
Following the policy announcement, economists are expecting the next policy action from RBI only by early next year. “This process can be taken to its logical conclusion by restoring the reverse-repo and repo rate gap back to 25 bps, depending on the actual growth outcomes. It appears that by the end of 2021 or early 2022, a reverse repo hike within the accommodative stance is possible, especially if the pace of vaccination improves and reduces the impact of the pandemic on economic activity further,” said Gaurav Kapur, chief economist, Indusind Bank.
According to Abheek Barua, chief economist at HDFC Bank, “RBI announced an increase in the quantum of variable reverse repos (VRR) by ₹2 trillion and also provided forward guidance on systemic liquidity to be close to ₹4 trillion by September. In response to tighter liquidity conditions, we expect short-term rates to increase and return on instruments like CPs to rise.”
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Business NewsEconomyRBI holds rates amid split in MPC over policy stance
First Published:7 Aug 2021, 08:40 AM IST
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