The Reserve Bank of India on Friday kept interest rates unchanged as inflation remained stubbornly high, but unleashed a host of other tools to cut borrowing costs in a bid to jump-start growth in the Asia’s third largest economy.
Citing inflation as a passing concern, the central bank maintained its dovish policy stance with picking up growth as its main objective.
While the RBI rate action was on the expected lines, Governor Shaktikanta Das’s comment that the economy is poised for a slight recovery in the fourth fiscal quarter, in a year in which gross domestic product (GDP) will register its biggest contraction since independence, it offered hope amid a parade of bad news.
Das said that various economic indicators in recent months have pointed to the need for a growth momentum to maintain the current momentum, as green shoots are visible in various sectors of the economy.
“The focus must shift from containment to reactivation,” he said, citing strong food grain production, rebounding purchasing manager indices, car sales, exports and the first signs of a shift in the survey. RBI consumer trust.
For the full year, RBI expects a 9.5% GDP contraction with downside risks.
RBI said growth is expected to improve dramatically in the first quarter of next fiscal year at 20.6%. This will be driven by a three-speed recovery with sectors resilient to the pandemic (such as agriculture, consumer goods, automotive, drugs and electricity) recovering faster, followed by a recovery in sectors in “strike form”, where the normalization of the activity is more gradual and Sectors “slog overs” intensive in contact that are most affected by social distancing.
“By all indications, the deep contractions in the first quarter are behind us; Silver reflections are visible in the flattening of the active case load curve. Barring the incidence of a second wave, India is prepared to ignore the deadly clutches of the virus and renew its rendezvous with its precovid growth trajectory, “he said.
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RBI measures to jumpstart growth included the infusion of additional liquidity and the transmission of policy measures to borrowers. RBI said it will introduce long-term repo transactions (TLTROs) for banks to borrow up to ₹1 trillion from the window and invest in corporate bonds and other debt instruments of certain sectors. He also said that the size of open market operations, under which the RBI buys and sells government securities, will increase to ₹Rs 20 billion to further flatten the yield curve and keep interest rates benign.
“This is important from the point of view of a smooth and fluid transmission of the impulses of the monetary policy, as well as the completion of the debt programs of the market of the Center and the states in a non-disruptive manner with a normal evolution of the yield curve, ”Das said.
This was the RBI’s first policy review under the newly formed monetary policy committee, which voted unanimously to keep the buyback rate unchanged at 4%. All members, except Jayanth R. Varma, voted to continue the accommodative stance for an extended period, or at least into the next financial year, to kickstart growth in a lasting way and ensure inflation remains within the range. goal.
“We remain cautious in generalizing these first green shoots, as they have benefited from base effects and unique changes in some sectors. With new covid-19 infections elevated, although certainly lower than previous levels, we expect economic agents to adjust to a new normal and we anticipate a slow recovery to pre-covid levels in many sectors, “said Aditi Nayar , Senior Economist ICRA Ltd.
In a note, Nomura’s chief economist in India, Sonal Varma, said the RBI’s commitment to maintaining its “accommodative” stance in fiscal year 22 is particularly strong. Combined with its commitment to providing liquidity and managing the bond supply, the policy measures are aimed at ensuring that transmission through markets (money, bonds, bank loans) does not freeze and that monetary policy remains active.
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