RBI assures liquidity for economy, keeps growth revival top priority

MPC unanimously votes in favour of keeping rates on hold and maintaining accommodative monetary policy stance.

The monetary policy committee of Reserve Bank of India (RBI) maintained status quo on interest rates for the sixth consecutive review meeting on Friday, indicating that reviving economic growth was top on its agenda as it decided to look through inflation pressure which are resurfacing in the economy due to a variety of factors including hardening of crude oil prices.

“The MPC also decided unanimously to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward,” said RBI governor Shaktikanta Das in Mumbai while announcing the policy review decision.

Policy measures on the liquidity front were broadly in line with expectation, with the central bank announcing the third tranche of bond buying worth Rs 40,000 crore under G-SAP 1.0. It also announced G-SAP 2.0, under which it will buy bonds worth Rs 1.2 trillion. The central bank will also buy bonds issued by state governments, unlike G-SAP 1.0 that was only for central government securities.

The central bank, in the April policy review meeting, had announced a bond-buying programme from the secondary market: namely Government Securities Acquisition Programme of Rs 1 trillion. The move was aimed at enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions.

“The monetary policy decision is in line with our expectation including the announcement of GSAP 2.0. The forward looking guidance on staying accommodative to support sustainable growth recovery and the balanced tone with a dovish bias was also expected,” said Anubhuti Sahay, head of economic research, South Asia, Standard Chartered Bank.

The central bank revised the growth projection downward to 9.5% from 10.5% for the current financial year. The projection was expected but the upward revision in inflation forecast, albeit marginal, has surprised the markets.

RBI’s inflation projection for the current financial year is at 5.1%.

“The increase in inflation projection is noteworthy though we believe any policy normalization is unlikely to start before the third quarter, that is, Oct-Dec quarter of2021. This also will be contingent on COVID curve and pace of vaccination,” Sahay said.

Aurodeep Nandi, India Economist & Vice President at Nomura, said the monetary policy hand-eye coordination is becoming complicated as a second wave of Covid-19 cases is impacting growth comes at a time of rising inflationary pressures.

“For now, we expect the RBI to remain accommodative for the foreseeable future, and the timing of the RBI’s ‘policy pivot’ towards normalization will remain crucially contingent on the economy’s ‘vaccine pivot’ towards sustainable growth recovery,” Nandi said

The RBI also announced liquidity support to the sectors hit by the second wave. “The have increased the GSAP programme in terms of liquidity availability from Rs 1 trillion to Rs 1.2 trillion. Additional liquidity has also been provided to the Covid stressed sectors, also to SIDBI for on-lending. Also the restructuring framework has been tweaked to include exposure upto RS 50 crore as compared to Rs 25 crore earlier,” said Sameer Narang, chief economist, Bank of Baroda.

The central bank announced a separate liquidity window of Rs 15,000 crore "contact-intensive sectors" like restaurants, travel agents, spa clinics and beauty parlours.