India’s central bank left its interest rates unchanged at the first rate-setting meeting of the year despite inflation slowing to the target band, but decided to lift its cash reserve ratio in two phases.
The Monetary Policy Committee of the Reserve Bank of India unanimously voted to maintain the policy repo rate at 4.00 percent. The reverse repo rate was retained at 3.35 percent.
The last change in the benchmark rate was a 40 basis point cut in May 2019, which took the cumulative reduction since February 2019 to 250 basis points.
The Marginal Standing Facility rate and the Bank rate were also left unchanged at 4.25 percent.
The RBI raised the cash reserve ratio to 3.5 percent with effect from March 27 and further to 4.00 percent from May 22. Thus, the bank reversed its March 2020 cut of 100 basis points, which was triggered by the economic impact of the coronavirus pandemic.
The normalization of CRR opens up space for a variety of market operations to inject additional liquidity, the bank said.
RBI Governor Shaktikanta Das said policymakers also unanimously decided to continue with the accommodative monetary policy stance as long as necessary, at least to the current financial year and into the next year to revive growth and ensure that inflation remains within the target.
Markets are too hawkish in discounting moderate hikes within the next 12-18 months, Capital Economics economist Shilan Shah said. The bank is likely to keep the repo and reverse rates on hold at their current low level for the foreseeable future, he added.
Inflation returned to the tolerance band, allowing policymakers to think of measures to support economic expansion, assuage the impact of Covid-19 and return the economy to a higher growth trajectory.
RBI projected 10.5 percent real GDP growth for 2021-22. Growth is seen in the range of 26.2 to 8.3 percent in the first half and 6.0 percent in third quarter of the fiscal year.
Consumer price inflation slowed to 4.6 percent from 6.9 percent in December, which was within the target band of 2.0-6.0 percent.
The projection for CPI inflation was revised to 5.2 percent for the fourth quarter of the fiscal year 2020-21. Inflation is seen at 5.2-5.0 percent in the first half and 4.3 percent for third quarter of the fiscal year.
In order to ensure that banks have additional funds to support recovery amid the stress caused by the Covid-19 pandemic, the RBI decided to extend the deadline for meeting the tranche of the capital conservation buffer.
Consequently, the implementation of the last tranche of the Capital Conservation Buffer of 0.625 percent and also that of the Net Stable Funding Ratio was deferred by another six months.
The material has been provided by InstaForex Company – www.instaforex.com
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