RBI keeps rates unchanged amid policy dissent on lower-for-longer stance

Policy makers voted 5-1 in favor of keeping the stance accommodative, a departure from the past when they were unanimous on the need to support growth amid the pandemic.

India’s central bank kept interest rates unchanged at a record low to support the economy, even as a split appeared among rate setters on continuing with the lower-for-longer stance.

The Reserve Bank of India’s six-member Monetary Policy Committee retained its main repurchase rate at 4% on Friday, as predicted by all 29 economists in a Bloomberg survey. Policy makers voted 5-1 in favor of keeping the stance accommodative, a departure from the past when they were unanimous on the need to support growth amid an impending third wave of the pandemic.

That follows the pace of inflation breaching the RBI’s upper tolerance limit of 6% in the past two months, a trend that was mainly attributed to supply side disruptions caused by the coronavirus pandemic. However, recent high-frequency indicators from purchasing managers’ surveys to jobless data showed the economy’s recovery was muted, necessitating more support.

Shorter-dated bonds declined after the dissenting vote on policy stance. The yield on 5.63% 2026 bond jumped 7 basis points to 5.78%, while that on the 10-year bond rose 4 basis points to 6.24%. The rupee was steady, while stocks declined.

The recent inflationary pressures are evoking a concern, Governor Shaktikanta Das said, adding that the RBI raised inflation forecast to 5.7% for the current financial year, from 5.1% previously. He cautioned that the trend was transitory and the economy needed continued support from all sides -- fiscal and monetary -- to nurture the recovery.

‘May Kill’
 

“The supply-side drivers could be transitory while demand-pull pressures remain inert, given the slack in the economy,” Das said about inflation. “A pre-emptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions.”

The central bank retained its own growth forecast for the current financial year at 9.5% -- the same pace predicted by the International Monetary Fund. There are risks to that outlook from an impending wave of the pandemic, with forecasters warning a surge in outbreak as soon as this month.

“The messaging is consistent from RBI’s previous statements,” said Rahul Bajoria, a senior economist at Barclays Bank Plc. “They are prioritizing growth revival, but the one member voting against the stance is a mild hawkish surprise,” he said.

The central bank also announced enhancing the amount of the so-called variable rate reverse repos to drain liquidity from the banking system in stages, from the current 2 trillion rupees. Still, Das clarified that it shouldn’t be read as a reversal of the accommodative bias.

Das also announced the following measures:

• Extends an on-tap Targeted Longer-Term Refinancing Operations program by three months, allowing more time to banks to lend to stressed businesses
• RBI decided to amend some guidelines on export credit in foreign currencies
• Extends by six months the deadline to hit targeted milestones under debt recast plans to help businesses impacted by the pandemic

--With assistance from Tomoko Sato, Kartik Goyal and Jaiveer Shekhawat.