The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC), which sets interest rates in the country, on June 4 kept key policy rates unchanged citing persisting uncertainties on the economic front due to the COVID-19 pandemic.
The MPC was keeping the repo rate at 4 percent and reverse repo rate at 3.35 percent, RBI Governor Shaktikanta Das announced. The marginal standing facility (MSF) rate and the bank rate remained unchanged at 4.25 percent.
"MPC has decided to continue with accomodative stance until necessary to mitigate impact of COVID-19," Das said.
The RBI also downgraded the GDP growth forecast for FY22 to 9.5 percent compared with 10.5 percent earlier.
The RBI’s action was in line with the consensus among economists about a status-quo in rates.
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Inflation based on retail prices remain above this medium-term target of 4 percent for quite a long time now. In April, the CPI inflation came at 4.29 per cent compared with 5.52 percent in the March backed by fall in food prices. This is the fifth consecutive month that CPI inflation is within the MPC's target range.
On the other hand, growth is a bigger concern. The Gross Domestic Product (GDP) contracted 7.3 percent in FY21. In the last policy review, the MPC had retained the GDP growth forecast for FY22 at 10.5 percent. Recently, SBI economists had sharply cut their FY22 GDP growth estimates to 7.9 percent from what was 10.4 percent earlier.
On June 4, Das said that the dent in urban demand and the spread of COVID-19 in rural areas will impact GDP growth negatively.
The RBI has cut the key policy rate by 250 basis points since February 2019. One bps is one hundredth of a percentage point.
In the last policy review, the RBI had clearly sounded cautious on the evolving growth situation saying lockdowns triggered by the second wave of COVID-19 cases could hamper growth recovery.
“The renewed jump in COVID-19 infections in certain parts of the country and the associated localised lockdowns could dampen the demand for contact-intensive services, restrain growth impulses and prolong the return to normalcy,” the RBI policy had said.
“In such an environment, continued policy support remains necessary,” it added.
In April, the MPC had kept the key policy rates unchanged. The MPC had retained the repo rate at 4 percent and the reverse repo rate stands at 3.35 percent, respectively.
The MPC is scheduled to meet next on August 4-6, 2021.
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