The Reserve Bank of India (RBI) Friday declared its intent to keep borrowing costs low for the government and companies by buying more bonds from the market, leaving key interest rates and the accommodative monetary policy stance unchanged to nurse a fragile economy back to health amid a global price surge in commodities.
The growth forecast for FY22 was scaled down by a percentage point to 9.5% and inflation expectations were raised amid supply side disruptions, signalling that the road to recovery could be bumpy.
The decisions were in line with expectations. All participants in an ET poll had said there would be status quo on rates and the stance besides the possibility of a reduction in the growth projection. The vote by the six-member monetary policy committee (MPC) was unanimous.
The central bank raised its bond purchases under the Government Securities Acquisitions Programme (G-SAP) by Rs 20,000 crore, or 20%, to Rs 1.2 lakh crore to allay bond market concerns after several bids devolved on primary dealers in the past few months, with investors seeking higher returns.
Governor Shaktikanta Das pledged that the central bank would do all it could to ensure that the economy recovers and stabilises before looking toward any shift in its stance.
The BSE Sensex fell 0.25% to close at 52,100.05 points on Friday. The benchmark bond yield rose about three basis points to 6.03%, while the rupee lost 0.12% to the dollar, closing at 73.
“The Reserve Bank will continue to use all instruments at its command and work to revive and sustain growth on a durable basis,” Das said.
Das Points to Rural Infection Risks
“The MPC was of the view that at this juncture, policy support from all sides is required to regain the momentum of growth that was evident in the second half last fiscal and to nurture the recovery after it has taken root,” he said.
The RBI and the MPC have been juggling the need to get the economy back on track after Covid ravaged businesses amid rising price pressures due to supply side bottlenecks. Furthermore, the flood of global liquidity has sparked a sharp rally in commodity prices, threatening the MPC’s ability to keep inflation from exceeding the upper end of the 2-6% target band. The inflation projection for FY22 is at 5.1%.
The MPC unanimously voted to keep the repo rate, at which the RBI lends to banks, at 4% and the monetary stance accommodative. The reverse repo rate, which the RBI pays banks for parking surplus funds with it, remains at 3.35%.
All other rates remain unchanged.
“Monetary policy hand-eye coordination is getting increasingly complicated, as the second wave that is impacting growth comes at a time of rising inflationary pressures,” said Aurodeep Nandi, economist at Nomura Securities. “The RBI’s policy actions were largely on expected lines — keeping all three levers —rates, stance and forward guidance unchanged and dovish, while relying on G-SAP as a tool to deliver further accommodation and to prevent any premature tightening of financial conditions.”
G-SAP was enhanced to Rs. 1.2 lakh crore in the second quarter from Rs. 1 lakh crore in the first.
The central bank lowered the GDP forecast by a percentage point as the second wave of Covid-19 led to various states announcing lockdowns.
The governor warned about the effects of the second wave spreading into villages.
“The increased spread of Covid-19 infections in rural areas, however, poses downside risks,” said Das.
The RBI said its primary objective at this juncture is to revive growth. Hence, it would continue with the monetary policy stance and wouldn’t hesitate to make it easier.
“With the second wave intensifying this financial year, the focus of the Reserve Bank is increasingly turning from systemic liquidity to its equitable distribution,” said Das. “In fact, the enduring lesson from the experience of the pandemic in the Indian context has been the deployment of unconventional monetary policy measures that distribute liquidity among all stakeholders. We shall continue with our proactive and pre-emptive approach.”
The next meeting of the MPC is scheduled for August 4-6. The minutes of the June 2-4 meeting will be published on June 18.