The Reserve Bank of India (RBI) monetary policy committee’s decision to keep rates on hold, accompanied by an accommodative stance as long as necessary will have an impact on growth, stated economists.
Indranil Pan, chief economist with YES BANK said, “The worsening growth inflation dynamics is apparent from the RBI’s forecast changes. Highlighting concerns over the virulent second COVID wave, the RBI acknowledged dent on urban and rural demand.” RBI governor Shaktikanta Das had acknowledged the growth risks and now projected a lower real GDP growth for the year at 9.5 per cent. Inflation projections have been raised too. “Given the current evolution of the growth-inflation dynamics, there was absolutely no scope for the RBI to change its policy rates,” reiterated Pan. “The growth-inflation mix is worsening for the RBI” will be a challenge for RBI going forward.
Radhika Rao, economist and senior vice president, DBS Singapore said, “The Reserve Bank of India monetary policy committee voted unanimously to keep rates on hold, accompanied by an accommodative stance and state-based guidance, which pushes back the risks of normalisation in policy to late FY22, in our view.”
Rao stated the focus of this monetary policy was beyond the mainstream rates, with the announcements resting on three pillars — firstly, the economic assessment took account of evolving risks of the second wave; secondly, the central bank’s priorities went beyond the policy rate; and thirdly, ensuring market stability remains a key cornerstone.
The MPC upped the inflation forecast for the better part of F Y22 by 20-30 bps and lowered GDP growth forecast. “ This shows that the committee’s priority is supporting growth recovery,” claimed Anagha Deodhar, chief economist, ICICI Securities.
To mitigate the adverse impact of the second COVID-19 wave on contact intensive sectors, a separate liquidity window of Rs 15,000 crore is being opened till March 31, 2022, with tenors of up to 3 years at the repo rate. Deodhar added that all the measures announced by RBI “are likely to keep financial conditions in the economy benign and support recovery.”
Abheek Barua, Chief Economist, HDFC Bank stated the central bank’s measure to provide liquidity support for contact intensive sectors is likely to aid credit flow to these sectors. "...A more equitable distribution of credit is likely to be contingent on whether the assessment of risks is in line with the markup over reverse repo provided by the RBI to banks. Therefore, some form of credit guarantees is perhaps required for de-risking the system."
The policy rate at 4 per cent is the lowest level in over a decade. The repo rate was last revised in May 2020 and thus this is the sixth consecutive policy in which the RBI has maintained status quo. According to Care Ratings, the tone of the current monetary policy “has been accommodative and supporting liquidity and credit off-take. But it needs to be seen whether the response from banks and industry is positive”.