RBI keeps rates on hold to support recovery, 'sail towards normal times'

Repo rate and the reverse repo rate remain unchanged at 4% and 3.35%

The Reserve Bank of India’s monetary policy committee kept key interest rates unchanged, while retaining an accommodative stance to help revive the economy, which is facing a slowdown due to the coronavirus pandemic.

Repo rate and the reverse repo rate remain unchanged at 4 per cent and 3.35 per cent, respectively, said RBI Governor Shaktikanta Das in a statement on Friday after a three-day meeting of the committee in Mumbai.

The RBI lowered its full year 2021/22 retail inflation projection to 5.3 per cent from 5.7 per cent, saying the inflation trajectory has turned out to be more favourable than expected. It maintained its full-year economic growth forecast at 9.5%.

"We derive comfort from the fact that the inflation trajectory is turning out to be more favourable than anticipated," Das said.

"In spite of global headwinds, we hope to emerge from the storm and sail towards normal times steered by the underlying resilience of the macroeconomic fundamentals of the Indian economy."

Latest factory data, purchasing managers’ surveys for manufacturing and services, consumption-tax data and import numbers suggest that India's economic recovery after the pandemic-induced downturn is picking up pace.

Inflation, according to the latest poll, is forecast to be well above RBI's medium-term target of 4 per cent, but it is projected to remain below the 6 per cent upper threshold until at least the end of 2024.

The outcome of the RBI policy meet was broadly in line with a Business Standard poll of 14 economists and bond market participants. Notwithstanding the rate hikes by other central banks and guidance by the US Federal Reserve to reduce its bond purchases from November, the RBI was unlikely to be in a hurry to act on rates, the economists had said.

"Overall, aggregate demand is improving but slack still remains; output is still below pre-pandemic levels and the recovery remains uneven and dependent upon continued policy support," Das said.

"Supply side and cost push pressures are impinging upon inflation and these are expected to ameliorate with the ongoing normalisation of supply chains," Das said.

However, he added that efforts to contain cost-push pressures through a calibrated reversal of indirect taxes on fuel could contribute to a more sustained lowering of inflation and an anchoring of inflation expectations.

The country's coronavirus vaccination pace has gathered momentum and greenshoots are visible in various sectors but consumer spending during the upcoming festival season will be crucial in determining the sustainability of the revival.

Das also tried to calm market concerns about any earlier exit from the RBI's ultra-loose monetary policy or any withdrawal of excess liquidity from the banking system.

"Our entire approach is one of gradualism. We do not want suddenness, we don't want surprises," Das said.