India’s central bank left its key interest rate unchanged at a record low and pledged to continue its accommodative stance as long as necessary despite inflation breaching its upper target band.
The six-member Monetary Policy Committee unanimously voted to hold the benchmark policy rate at 4.00 percent, the Reserve Bank of India said Friday. The reverse repo rate was retained at 3.35 percent.
The Marginal Standing Facility rate and the Bank Rate were also left unchanged at 4.25 percent at the meeting.
The MPC decided on a 5 to 1 majority to continue with the accommodative stance to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target, going forward.
Looking ahead, the central bank appears in no rush to tighten policy, Capital Economics economist Darren Aw said.
“We don’t think policy normalization will start until the second half of next year, and we suspect that it will begin with the slow removal of liquidity support before policy rates are increased,” the economist added.
RBI Governor Shaktikanta Das said the bank remains in “whatever it takes” mode, with a readiness to deploy all its policy levers – monetary, prudential or regulatory.
The governor also said the continued policy support from all sides – fiscal, monetary and sectoral – is required to nurture the nascent and hesitant recovery.
Inflation has remained above the central bank’s tolerance band of 6 percent in May and June.
The RBI raised its inflation forecast for 2021-22 to 5.7 percent from 5.1 percent. Nonetheless, the bank said inflationary pressures are transitory and largely driven by adverse supply side factors.
“The supply-side drivers could be transitory while demand-pull pressures remain inert, given the slack in the economy,” said Das.
“A pre-emptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions.”
The growth outlook for the current financial year was maintained at 9.5 percent. The bank noted that global commodity prices and financial market volatility, coupled with vulnerability to new waves of infections are downside risks to economic activity.
Given the nascent and fragile economic recovery, the RBI decided to extend the on-tap targeted long-term repo operations program by three months.
The bank decided to amend the guidelines related to export credit in foreign currency and restructuring of derivative contracts.
Further, the RBI extended the deadlines for companies to meet certain financial ratios that are required to avail the resolution plans announced in August 2020.
Source: Read Full Article