The monetary policy commitee (MPC) decided to keep the policy repo rate (the rate at which the RBI lends money to commercial banks) unchanged at 4%. It also retained the GDP forecast for 2021-22 at 9.5%, while raising the inflation forecast to 5.7%, stating that it expects the pressure to ease on the prices front with the arrival of the kharif crop and the impact of the supply side measures. This is the seventh consecutive meeting when the RBI has kept rates unchanged.
“The outlook for aggregate demand is improving, but the underlying conditions are still weak. Aggregate supply is also lagging below pre-pandemic levels. While several steps have been taken to ease supply constraints, more needs to be done.The recent inflationary pressures are evoking concerns; but the current assessment is that these pressures are transitory and largely driven by adverse supply side factors,” RBI governor Shaktikant Das said in his policy statement.
“The conduct of monetary policy during the pandemic has been geared to maintain congenial financial conditions that nurture and rejuvenate growth. At this stage, therefore, continued policy support from all sides – fiscal, monetary and sectoral – is required to nurture the nascent and hesitant recovery,” said Das. The implication for borrowers is that there is not much scope for interest rates to come down, barring some pass-through of earlier cuts by lenders. The RBI has cut the repo rate by 250 basis points (1%=100bps) since February 2019 and banks have responded with a 217-bps cumulative decline in their weighted average lending rate.
Das said that the country was in a much better position than it was in June 2021 but advised caution. “The need of the hour is not to drop our guard and to remain vigilant against any possibility of a third wave, especially in the background of rising infections in certain parts of the country,” he said. Announcing the MPC decision, Das said that members were unanimous on retaining the repo rate at 4%. However, one member, J R Varma, voted against the proposal to continue with the ‘accommodative’ stance.
“The decision of keeping the repo rate unchanged along with maintaining of accommodative stance is on expected lines as low-interest rates are critical to an economic revival,” said SS Mallikarjuna Rao, MD & CEO, Punjab National Bank. In his interaction with the media, Das said that the new variable rate reverse repo which could soak up a large part of liquidity was not a reversal of the accommodative phase.