RBI keeps repo rate unchanged at 4%; maintains accommodative stance

The RBI MPC voted unanimously to keep the key policy rate unchanged

The Monetary Policy Committee (MPC) of the Reserve Bank of India on Friday decided to keep repo rate unchanged at 4 per cent. The reverse repo rate stays at 3.35 per cent. The central bank has projected the GDP growth for Q3 at +0.1 per cent and +0.7 per cent for Q4.

RBI Governor Shaktikanta Das said, "The MPC decided to continue with accommodative stance of the monetary policy as long as necessary, at least till the current financial year and into next year to revive growth on a durable basis & mitigate the impact of Covid-19 while ensuring that inflation remains within target."

He further said that the MPC was of the view that inflation is likely to remain elevated with some relief in the winter months from prices of perishables and bumper kharif arrivals. Speaking on GDP growth Das said, "The real GDP growth for 2021 is projected at minus 7.5 per cent. The recovery in rural demand is expected to strengthen further while urban demand is also gaining momentum,"

The RBI last changed policy rate on May 22. This is the third time in a row that the central bank has decided to maintain status quo.

The decision comes in the backdrop of the September quarter Q2 GDP turning out to be better than RBI's earlier projections. GDP contracted by 7.5 per cent in the July-September quarter, lower than the central bank’s prediction of 8.6 per cent.

Experts had earlier indicated that the stubborn retail inflation, which remained above the comfort level of the RBI of around 4 per cent, will refrain the central bank from reducing the interest rate.
 

The central bank has been dealing with the challenges of striking a balance between the increased and continuous requirement of high liquidity, and taming retail inflation. The three-day RBI bi-monthly policy was going on since Wednesday and the outcome of the six-member MPC was issued by the Governor.

In its October monetary policy statement, the RBI had said the real GDP growth in 2020-21 was expected to be negative at (-)9.5 per cent, with risks tilted to the downside: (-)9.8 per cent in Q2 2020-21; (-)5.6 per cent in Q3; and 0.5 per cent in Q4.

According to the Finance Ministry's Monthly Economic Review, the year-on-year GDP contraction of 7.5 per cent in Q2 of 2020-21 underlies a quarter-on-quarter surge in GDP growth of 23 per cent. This V-shaped recovery, evident at the half-way stage of 2020-21, reflects the resilience and robustness of the Indian economy.

A report by Yes Bank said though India has officially entered into a technical recession with second-quarter GDP print, "we believe that we are past the nadir in India's growth trajectory. The sharper than expected recovery in key economic indicators is suggestive of this view".

Assocham Secretary General Deepak Sood had said that the RBI has done a commendable job in handling the situation arising out of the Covid-19 pandemic. It has reached out to a number of sectors like mutual funds, realty, NBFCs, and MSMEs, besides the all-encompassing moratorium on loan repayments. "In our assessment, the current inflation should be a temporary phenomenon and would ease as supply disruptions resulting from Covid-19 related restrictions are getting resolved," Sood said.