Tuesday, 4 October, 2022
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RBI sticks to script, holds rates due to inflation and fiscal deficit

RBI projects growth for 2020-21 at 6%. Repo rate retained at 5.15% and reverse repo rate at 4.9%.

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New Delhi: The Reserve Bank of India (RBI) Thursday announced a status quo in key policy rates amid rising inflation. The central bank also forecast the Indian economy to grow at 6 per cent in 2020-21.

The RBI retained the repo rate at 5.15 per cent and the reverse repo rate at 4.9 per cent.

The decision of the six-member monetary policy committee (MPC), which includes the RBI governor, was unanimous.

“The MPC recognises that there is policy space available for future action. The path of inflation is, however, elevated and on a rising trajectory through Q4:2019-20. The outlook for inflation is highly uncertain at this juncture,” the RBI said in its statement.

“On the other hand, economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain status quo,” said the central bank.

It added, “The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.”

Also read: Modi’s thalinomics approach to economy is a plate filled with confusion

Tough ask of MPC

The RBI monetary policy committee had paused its rate cut cycle in December, after having cut rates by a total of 1.35 percentage points since February last year, despite concerns over decelerating growth. At the time, the MPC had said there was a need to optimise the impact of rate reductions announced until then and stressed the need for monetary and fiscal policy to work together.

Since then, inflation has zoomed coming in at 7.35 per cent in December, much higher than the RBI’s mandated inflation target of 4 per cent and even crossing the 6 per cent upper tolerance band.

Assuming a normal south west monsoon in 2020-21, the monetary policy committee has projected retail inflation at 5.4-5.0 per cent for first half of 2020-21 and at 3.2 per cent from the third quarter of the next fiscal.

The policy announcement also comes days before the government presented its annual budget revising its fiscal deficit numbers for 2019-20 higher to 3.8 per cent from the initially budgeted 3.3 per cent.

However, the government managed to rein in its borrowing from the markets by relying on the National Small Savings Fund to ensure that bond yields don’t go up. Finance Minister Nirmala Sitharaman will address the RBI’s central board on 15 February on the Union Budget.

The National Statistical Office has projected the Indian economy to grow at 5 per cent in 2019-20, the slowest in 11 years. The Economic Survey 2020, released last month, expects growth to rebound in 2020-21 to 6-6.5 per cent.

Also read: Modi govt has tried to stimulate economy without creating future crisis: Expenditure Secy


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