Mumbai: To curb the rise in inflation, and stabilize the general economic environment, the Reserve Bank on Thursday retained its key short-term lending rates but maintained its growth-oriented accommodative stance.
The Monetary Policy Committee of the central bank maintained the repo rate — or short-term lending rate for commercial banks, at 4 percent.
Likewise, the reverse repo rate stands unchanged at 3.35 percent, and the marginal standing facility (MSF) rate and the ‘Bank Rate’ at 4.25 percent.
It was expected that the Reserve Bank’s MPC might hold rates as recent data showed that retail inflation has been at an elevated level during June.
The retail or consumer price index stood at 6.09 percent in June. The urban CPI stood at 5.91 percent and rural at 6.20 percent. The RBI maintains a medium-term CPI inflation target of 4 percent. The target is set within a band of +/- 2 percent.
In an online address detailing the MPC decision, RBI Governor Shaktikanta Das said the MPC was of the view that supply chain disruptions on account of the Covid-19 pandemic persist, with implications for both food and non-food prices.
“A more favorable food inflation outlook may emerge as the bumper rabi harvest eases prices of cereals, especially if open market sales and public distribution offtake are expanded on the back of significantly higher procurement. Nonetheless, upside risks to food prices remain,” he said.
“The abatement of price pressure in key vegetables is delayed and remains contingent upon normalization of supplies. Protein-based food items could also emerge as a pressure point.”
Besides, Das, in his address, pointed out that higher domestic taxes on petroleum products have resulted in elevated domestic pump prices and will impart broad-based cost-push pressures going forward.
“Taking into consideration all these factors, the MPC expects headline inflation to remain elevated in Q2:2020-21, but likely to ease in H2:2020-21, aided by favorable base effects.
“Given the uncertainty surrounding the inflation outlook and extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, the MPC decided to keep the policy rate on hold, while remaining watchful for a durable reduction in inflation to use available space to support the revival of the economy.”
On the growth front, Das said that real GDP growth is estimated to be negative during FY2020-21 as a whole.
“An early containment of the Covid-19 pandemic may impart an upside to the outlook. A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks,” he said.
He was of the view that the world may face a second wave of the novel coronavirus as economic activities open up.
“World is bracing for a second wave of the pandemic as economies open up,” Das said.
Commenting on the monetary policy announcement, SBI Chairman Rajnish Kumar, who is also the Chairman, IBA, said: “The Reserve Bank of India’s monetary policy statement draws a fine balance between the challenges posed due to Covid-19 pandemic shock and the need to support growth and financial stability.”
Suman Chowdhury, Chief Analytical Officer, Acute Ratings & Research, said: “MPC’s decision to hold on to the existing rates appears to stem from its belief that the short term inflation outlook will be uncertain due to supply constraints and cost-push factors.”
“While the repo rates are almost close to the bottom, we believe there is a possibility of another round of 25-50 bps of a rate cut over the next 6 months.”
