‘Recovery turning broad-based, warrants continued support’

The continuing liberal monetary stance of the central bank and receding fears over Omicron boosted the stock markets with the BSE Sensex rallying by 1,016 points, or 1.76 per cent, to 58,649.68 and the Nifty rising 293 points at 17,469.75.

“Given the slack in the economy and the ongoing catching-up of activity, especially of private consumption, which is still below its pre-pandemic levels, continued policy support is warranted for a durable and broad-based recovery,” RBI Governor Shaktikanta Das said in a statement. The central bank also retained the reverse repo rate – the rate at which the RBI borrows from banks – at 3.35 per cent, indicating that it’s not yet ready for the normalisation of the accommodative policy.

“Against this backdrop, the MPC decided to retain the prevailing repo rate at 4 per cent and continue with the accommodative stance,” Das said. Downside risks to the outlook have risen with the emergence of Omicron and renewed surges of COVID-19 infections in a number of countries, he said.

The central bank has retained its real gross domestic product (GDP) growth projection for FY22 at 9.5 per cent, the same as two months ago.

The MPC also seems to have got some cushion from inflation projections. The RBI has projected consumer price (CPI) inflation at 5.3 per cent for FY2021-22 and 5 per cent for the first half of the next financial year. CPI inflation was below 5 per cent in both September and October 2021.

The MPC noted that the recovery in domestic economic activity was turning increasingly broad-based. Rural demand is expected to remain resilient while the spurt in contact-intensive activities and pent-up demand will continue to bolster urban demand, it said. That said, activity is “just about catching up with pre-pandemic levels and will have to be assiduously nurtured by conducive policy settings till it takes root and becomes self-sustaining,” the MPC resolution said.

“Downside risks remain significant rendering the outlook highly uncertain, especially on account of global spill overs, the potential resurgence in COVID-19 infections with new mutations, persisting shortages and bottlenecks and the widening divergences in policy actions and stances across the world as inflationary pressures persist,” the resolution added.

Moreover, as Das said, the recurrence of COVID-19 waves in many parts of the world including the appearance of the Omicron variant, stubborn inflation and headwinds from continuing supply bottlenecks cast a shadow on the outlook. The MPC resolution also highlighted the importance of normalising excise duty and value added tax along with other measures to address input cost pressures to ensure a sustained lowering of core inflation.

Summing up the approach, Das said that “managing a durable, strong and inclusive recovery is our mission”.

The central bank also announced measures to reduce the excess liquidity in the banking system. It increased the amount of money it will absorb through so-called variable rate reverse repos to Rs 7.5 lakh crore by the end of December.

Separately, the RBI has also proposed to launch a Unified Payments Interface (UPI) based payment product for feature phone users. It is also considering enabling small value transactions through an “On-device” wallet in UPI apps which will conserve banks’ system resources, without any change in the transaction experience for the user.

Bankers said the RBI policy was on the expected lines. “As expected, the benchmark rates were kept unchanged with accommodative stance. The economic outlook sounded more optimistic as the major indicators such as agriculture and allied activities, spending on travel and tourism, GST receipts and air passenger traffic indicated a more robust and broad-based recovery. The persistently high core inflation, however, remained a key figure determining the path of policy,” said S. S. Mallikarjuna Rao, MD & CEO, Punjab National Bank.