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RBI monetary policy | Inflation debate gets louder, Sensex falls

Though the RBI says growth remains its focus during these uncertain times, inflation, too, seems to playing on the minds of MPC members, say analysts

August 06, 2021 / 12:18 PM IST

Extending its wait-and-watch mode, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) kept key lending rates and policy stance unchanged on August 6.

The development was along expected lines but the market saw some bouts of volatility after the RBI Governor Shaktikanta Das shared the outcome of the three-day meeting.

Market benchmark the Sensex fell more than 200 points but soon pared losses, with rate-sensitive banking, auto and realty stocks trading mixed.

The central bank left the repo rate unchanged at 4 percent and the reverse repo rate at 3.35 percent. Sharing the outcome of the bi-monthly review, Das said the policy stance would continue to be accommodative.

"The recovery remains uneven across sectors and needs to be supported by all policymakers. The Reserve Bank remains in 'whatever it takes' mode, with a readiness to deploy all its policy levers—monetary, prudential or regulatory," he said.


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Inflation debate

The market seems to have taken a hint that the RBI has started noticing rising inflation and the deliberations to gradually shift away from the dovish stance had begun.

The RBI Governor said inflation may remain close to the upper tolerance band of 6 percent up to Q2FY22. However, he added that these pressures should ebb in Q3FY22 on account of kharif harvest arrivals and as supply-side measures take effect.

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"Taking into consideration all these factors, CPI inflation is now projected at 5.7 percent during FY22, 5.9 percent in Q2, 5.3 percent in Q3, and 5.8 percent in Q4 of FY22, with risks broadly balanced. CPI inflation for Q1FY23 is projected at 5.1 percent," Das said.

Also read: RBI monetary policy: MPC maintains status quo, 10 rate-sensitive stocks to buy for medium to long term

Inflation, it seems, is getting RBI’s attention even as the central bank said growth remains its focus during these uncertain times.

"Though the MPC voted unanimously to keep the rates unchanged, votes for the continuance of accommodative stance were at 5:1. It shows that the inflation debate is getting more prominent. The forecast of inflation rate for FY22 was revised upwards to 5.7 percent from 5.1 percent announced earlier," Deepthi Mathew, Economist at Geojit Financial Services said.

Besides, the market probably was expecting a more optimistic tone from the RBI on economic growth, especially after the recent encouraging macroeconomic prints.

Projection of real GDP growth was retained at 9.5 percent in FY22—21.4 percent in Q1, 7.3 percent in Q2, 6.3 percent in Q3 and 6.1 percent in Q4. Real GDP growth for Q1FY23 is projected at 17.2 percent, Das said.

Even though the RBI said the economy was in a much better position from the last policy meeting, there were words of caution.

"External demand remained buoyant during Q1FY22 and was reflected in increasing exports, lending critical support to aggregate demand. Strong external demand is an opportunity for India and further policy support should help in capitalising on this," Das said.

Global commodity prices and episodes of financial market volatility, together with vulnerability to new waves of infections, however, were downside risks to economic activity," the country’s top banker said.

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, said while RBI maintained its GDP growth forecast at 9.5 percent for FY22, it scaled down growth projections for the next few quarters while enhancing the growth estimates for the first quarter.

"This reflects the central bank’s concerns on the pace of consumption demand revival despite the expectations of a favourable Kharif crop, buoyant exports, steady progress in vaccination, and a conducive monetary and fiscal policy," Chowdhury said.

The RBI is doing all it can to support the economy. However, clear signals were expected on how the central bank plans to begin policy normalisation, when it expects economic growth to stabilise and inflation to remain high.

"While RBI would continue to maintain adequate systemic liquidity and implement the previously announced programmes like the Government Securities Acquisition Programme (GSAP), it has also announced its intent to manage short-term liquidity more actively through a significantly higher quantum of Variable Rate Reverse Repo Auctions (VRRR). However, there are no clear indications regarding the timeframe for the normalisation of the policy corridor," said Chowdhury.

Overall, there were no major negative signals for the market in the RBI MPC outcome. Perhaps, RBI thinks it is too early to talk about policy normalisation.

"The RBI is rightly concerned that any departure from the present pro-growth monetary policy may kill the nascent and hesitant recovery. The communication from the central bank augurs well for the continuation

of the growth impulses in the economy," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Disclaimer: The views and investment tips expressed by investment experts on are their own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Aug 6, 2021 12:18 pm
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