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Amid fears of the COVID-19 pandemic’s impending third wave and rise in retail inflation, the Reserve Bank of India (RBI) maintained the status quo on the key policy rates. The RBI will have to observe the emerging macroeconomic conditions for some more time.
RBI’s Stance on Key Policy Rates
During the third bi-monthly financial policy review for the financial year 2022 (FY22), the RBI has decided to maintain the status quo on the key policy rates for the seventh consecutive time. This decision comes at a time when the country is looking at a possible third wave of the COVID-19 pandemic as the vaccination pace has slowed considerably. The RBI’s Monetary Policy Committee (MPC) decided to keep the interest rates unchanged to support growth and aid better recovery from the pandemic’s second wave.
Shaktikanta Das, the Governor of RBI, stated that the MPC is going to maintain interest rates at 4%. Besides the repo rate, the Marginal Standing Facility (MSF) rate and reverse repo rates will remain the same and stand at 4.5% and 3.35%, respectively.
The six-member MPC unitedly voted to retain the policy repo rate. However, the vote to stay with the accommodative stance was decided by a 5 to 1 majority. As per discussions from the MPC’s bi-monthly meet, high-frequency indicators are also looking positive.
According to the MPC statement;
The nascent and hesitant recovery needs to be developed through fiscal, monetary and sectoral policy levers. Hence, the MPC decided to keep the policy repo rate unchanged at 4 percent and continue with an accommodative stance as long as necessary to revive and sustain growth on a strong basis and remain to ease the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.
Key Takeaways from Monetary Policy Committee’s Meeting
Gross Domestic Product (GDP) Rate Projection
The overall real GDP rate projection is retained at 9.5%. However, the first quarter projection is revised upwards while the following three quarterly forecasts are revised downwards.
The central bank is taking small steps towards standardization of its ultra-easy financial policy and has decided to conduct four fortnightly Variable Rate Reverse Repo (VRRR) auctions. These auctions will happen over a 14-day course to absorb the banking system’s surplus liquidity. As of August 4th, the surplus liquidity was at Rs. 8.50-lakh-crore.
The RBI Governor did stress that the VRRR auctions must not be misinterpreted as the reversal of the accommodative policy. This is because the sum absorbed under the fixed-rate reverse repo is likely to remain more than Rs. 4-lakh crore by the end of September.
Dates of VRRR Auctions
The central bank will conduct VRRR auctions of:
- Rs. 2.5-lakh crore on August 13th
- Rs. 3- lakh crore on August 27th
- Rs. 3.5-lakh crore on September 9th
- Rs. 4-lakh crore on September 24th
When asked if the monetary policy was sending mixed signals, the RBI governor said,
We are in the middle of an extraordinary situation arising from the pandemic. There are many conflicting objectives which the RBI has to manage.
Das highlighted that a pre-emptive financial policy response at this point might kill the emerging economic recovery. He also said that the domestic economic movement is coming back to normal post-phase re-opening of the economy. Investment, consumption, and external demand are also on the path of recovery and the external demand remains optimistic. Financial market instability and global commodity prices remain downside risks to a financial activity.
Agricultural production and rural demand are expected to remain strong in the near future. Das also said that the MPC has noted a positive upward trend in economic activity. However, the rise in new Covid positive cases can lead to another lockdown, and, thus, numerous high-frequency indicators can be leveled off.