The Reserve Bank of India (RBI) on Friday decided to keep benchmark interest rate unchanged at 4 per cent but maintained an accommodative stance as the economy is yet to recover from the impact of second COVID wave.
This is the seventh time in a row that the Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das has maintained status quo. RBI had last revised its policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting interest rate to a historic low.
MPC decided to maintain status quo, that is keeping benchmark repurchase (repo) rate at 4 per cent, Das said while announcing the bi-monthly monetary policy review.
Consequently, the reverse repo rate will also continue to earn 3.35 per cent for banks for their deposits kept with RBI.
Das said MPC voted unanimously for keeping interest rate unchanged and decided to continue with its accommodative stance as long as necessary to support growth and keep inflation within the target.
MPC has been given the mandate to maintain annual inflation at 4 per cent until March 31, 2026, with an upper tolerance of 6 per cent and a lower tolerance of 2 per cent.
Observing that economy is slowly recovery from brief hiatus, the Governor said, some of the high frequency indicators reflect recovery.
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– The RBI’s rate-setting panel MPC began its three-day deliberations on Wednesday to finalise the bi-monthly monetary policy amid expectations that it may opt for status quo on interest rate on account of inflationary concerns.
-The RBI had kept key interest rates unchanged at the last MPC meeting held in April.
– The key lending rate, the repo rate, was kept at 4 per cent and the reverse repo rate or the central bank’s borrowing rate at 3.35 per cent.
WATCH: Address by Shaktikanta Das, Governor, Reserve
Headed by the RBI Governor, the six-member MPC also includes three external members.
Experts are of the view that the RBI may prefer to wait and watch for some more time before taking any major action on the monetary policy front as the central bank’s focus is on managing inflation as well supporting economic growth.
The central bank had left the benchmark interest rate unchanged at 4 per cent at the June policy meet. It was for the sixth time in a row that the MPC maintained status quo on interest rate.
Moreover, the MPC has continued with the accommodative policy stance after changing it from neutral in June 2019.
The Reserve Bank, which mainly factors in the retail inflation while arriving at its monetary policy, has been mandated by the government to keep the Consumer Price Index (CPI) based inflation at 4 per cent with a margin of 2 per cent on either side.
Inflation ruled above the tolerance band during June-November 2020 and has again moved above the upper tolerance threshold in May and June 2021.
The sense is that inflation will persist at these elevated levels for some months before easing in the third quarter of 2021-22 when the kharif harvest arrives in markets, a recent RBI article had said.
The RBI annual report released last week has already made it clear that “the conduct of monetary policy in 2021-22, would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.”
The Reserve Bank, the report added, would ensure that system-level liquidity remains comfortable during 2021-22 in alignment with the stance of monetary policy, and monetary transmission continues unimpeded while maintaining financial stability.
In the assessment of the RBI, the evolving CPI inflation trajectory is likely to be subjected to both upside and downside pressures. The food inflation path will critically depend on the temporal and spatial progress of the south-west monsoon in 2021.
The government has retained the inflation target at 4 per cent with the lower and the upper tolerance band of 2 per cent and 6 per cent, respectively, for the next five years (April 2021 – March 2026).
Retail inflation, based on Consumer Price Index (CPI), slipped to a three-month low of 4.29 per cent in April mainly on account of easing of prices of kitchen items like vegetables and cereals. The RBI mainly factors in the CPI while arriving at its monetary policy.
As per the RBI annual report, supply-demand imbalances may continue to exert pressure on food items like pulses and edible oils, prices of cereals may soften with bumper foodgrains production in 2020-21.
