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RBI keeps same rates for 8th time, hints end of easy money

Interest rates in the banking system are expected to remain steady as the Monetary Policy Committee (MPC) kept the repo rate unchanged at 4 per cent, reverse repo rate at 3.35 per cent, and the marginal standing facility (MSF) rate and bank rate at 4.25 per cent in the bi-monthly monetary policy review.

Written by George Mathew | New Delhi |
Updated: October 9, 2021 2:12:17 am
Reserve Bank of India Governor Shaktikanta Das interacts with the media (Express Photo by Tashi Tobgyal)

The Reserve Bank of India (RBI) Friday kept key interest rates unchanged for the eighth time in a row, slashed the inflation target for 2021-22 to 5.3 per cent, and indicated the unwinding of the accommodative policy as the economy shows signs of emerging from the impact of the Covid-19 pandemic.

Interest rates in the banking system are expected to remain steady as the Monetary Policy Committee (MPC) kept the repo rate unchanged at 4 per cent, reverse repo rate at 3.35 per cent, and the marginal standing facility (MSF) rate and bank rate at 4.25 per cent in the bi-monthly monetary policy review.

On unwinding of the accommodative monetary policy, RBI Governor Shaktikanta Das said “this process has to be gradual, calibrated and nondisruptive, while remaining supportive of the economic recovery”. The potential liquidity overhang amounts to more than Rs 13.0 lakh crore, he said.

As the economy shows signs of emerging from the ravages inflicted by the pandemic, a near consensus view emerging among market participants and policy makers is that the liquidity conditions emanating from the exceptional measures instituted during the crisis would need to evolve in sync with the macroeconomic developments to preserve financial stability, Das said.

RBI has discontinued the government securities acquisition programme (G-SAP) as part of liquidity normalisation. The central bank pumped Rs 2.37 lakh crore through various market operations including G-SAP in the first six months of the current year to revive the economy.

“Our entire approach is one of gradualism. We don’t want suddenness or surprises. More so, we realise as we approach the shore, we don’t want to rock the boat. Because we realise there are lives and journeys beyond the shore, so we don’t want surprises. Our approach will be calibrated, it will be an approach of gradualism,” he said.

The MPC said it will 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 on the economy. While five members of the six-member MPC, including Governor Das, supported the continuation of the accommodative stance, Jayanth Varma expressed reservations on retaining the stance.

The RBI has slashed the inflation forecast for 2021-22 to 5.3 per cent from the 5.7 per cent estimated earlier. Going forward, the inflation trajectory is set to edge down during Q3 of 2021-22, as several evolving factors provide comfort on the food price front. Its momentum is expected to remain muted in the near term, it said.

The RBI has retained the projection for real GDP growth at 9.5 per cent in 2021- 22, consisting of 7.9 per cent in Q2 of the current year. “Almost all components of GDP registered y-o-y growth, despite a sharp loss of momentum due to the second wave. Recovery in aggregate demand gathered pace in August-September,” the RBI said.

According to Das, overall, aggregate demand is improving but slack remains. “Output is still below pre-pandemic level and the recovery remains uneven and dependent upon continued policy support,” he said.

According to the RBI, even as the domestic economy is showing signs of mending, the external environment is turning more uncertain and challenging, with headwinds from slowing growth in some major Asian and advanced economies, a steep jump in natural gas prices in the recent weeks, and concerns emanating from normalisation of monetary policy in some major advanced economies.

“Against this backdrop, the ongoing domestic recovery needs to be nurtured assiduously through all policy channels. The MPC will remain watchful given the uncertainties surrounding the outlook for growth and inflation,” the RBI said.

Das said domestic economic activity is gaining traction with the ebbing of the second wave. Going forward, rural demand is likely to maintain its buoyancy, given the above normal kharif sowing and bright rabi prospects. “The substantial acceleration in the pace of vaccination, the sustained lowering of new infections and the coming festival season should support a rebound in the pent-up demand for contact intensive services, strengthen the demand for non-contact intensive services, and bolster urban demand,” he said.

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