The policy is expected to boost growth as it sends a signal that interest rates have bottomed out, but funds would be available at current rates for the next few quarters.
“The growth momentum that has emerged bodes well for the revitalization of the Indian economy,” said the RBI governor. Shaktikanta das said.
Inflation is likely to remain high
“The political stimuli by the government and the RBI are intended to nurture these growth spurts with greater force. Efforts are underway to ensure a calibrated unlocking of the economy, with awareness and caution about the virus, ”said RBI Governor Shaktikanta Das in his monetary policy statement that was broadcast live.
“While we remain vigilant, we must now dedicate ourselves to alleviating the scars left by the pandemic and reviving the economy. The horizon has brightened with the flood of positive news about vaccines and a steady increase in recoveries, “said Das.
The RBI governor said the policy stance should be accommodative in terms of liquidity until fiscal year 21, as signs of recovery are far from broad-based.
All six MPC members voted unanimously to keep the RBI’s key lending rate to banks, or the buyback rate, at 4%. The reverse buyback rate, or the rate offered to banks for their surplus funds, remained at 3.35%.
Banks have said that interest rates will not drop any further for borrowers as deposit growth has slowed and credit growth is slowly returning. Das gave no indication that there was room for more rate cuts as it has in the past.
“The data shows that the economy is recovering faster than expected. The contraction in the second quarter was less than expected. The positive outlook is clouded by an increase in infection in some parts of the country. Taking these factors into account, real GDP for fiscal year 21 is projected at -7.5%. For the third quarter to 0.1% and 0.7% for the fourth quarter, and from 21.9% to 6.5% in the first semester: 2021-22, with broadly balanced risks, ”said Das.
The RBI governor said that monetary policy was of the opinion that inflation is likely to remain high, with some relief in the winter months due to the prices of perishable goods and the abundant arrivals of kharif. “This limits monetary policy at the current juncture to use the available space to act in support of growth. At the same time, signs of recovery … depend on sustained political support. There is a small window available for proactive supply management strategies to break the inflationary spiral fueled by supply chain disruptions, excessive margins and indirect taxes. More efforts are needed to mitigate supply-driven inflationary pressures, ”Das said. The RBI projected a CPI inflation at 6.8% for the third quarter, 5.8% for the fourth quarter 2020-21; and from 5.2% to 4.6% in H1: 2021-22.
Experts said the RBI’s monetary policy statement signaled the central bank’s readiness to take steps to boost growth despite the looming shadows of inflationary pressures.
“The tone remains subdued, although the change in the buyback rate was kept on hold and the promise of taking measures to boost growth was added. The continued accommodative stance will further boost business confidence, ”said Padmaja Chunduru, Chief Executive Officer and Chief Executive Officer of Indian Bank. “We can expect signs of recovery in the second quarter and the positive growth projected for the second quarter to improve the debt service capacity of companies in the future,” he added.
Among the liquidity improvement measures, the government extended specific long-term buyback operations to the 26 sectors to which the government recently extended its emergency line of credit guarantee scheme. The TLTRO encourages banks to invest in corporate bonds. These 26 sectors were originally identified by the Kamath Committee and included energy, construction, iron and steel, roads, and real estate.
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