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Opinion

RBI keeps repurchase rate unchanged, ‘accommodative’ stance

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The Reserve Bank of India (RBI) on Friday kept its key interest rate unchanged for the third time in a row, as widely expected amid high inflation, and said it will maintain an accommodative stance, implying it could have more rate cuts in the future if necessary. emerges to support the economy hit by the coronavirus pandemic. The repurchase rate was unchanged at 4%, while the reverse repurchase rate or the key interest rate was unchanged at 3.35%.

RBI Governor Shaktikanta Das said the Monetary Policy Committee (MPC) voted unanimously to keep the buyback rate unchanged. He also said the economy was recovering faster than expected from a coronavirus pademic-induced recession earlier in the year, but cautioned that signs of recovery were far from wide.

“MPC decided to continue with accommodative monetary policy positions for as long as necessary, at least until the current financial year and next year in order to reactivate growth in a lasting way and mitigate the impact of Covid-19 while ensuring that inflation remains. inside the target, Das said. “MPC decided to continue with accommodative monetary policy positions for as long as necessary, at least until the current financial year and next year in order to reactivate growth in a lasting way and mitigate the impact of Covid-19 while ensuring that inflation remains. inside the target, Das said.

Repo is the rate at which the central bank lends funds to commercial banks when needed and is used by the RBI as a tool to control inflation. The reverse buyback rate is the rate at which the RBI borrows from banks.

The RBI has cut the buyback rate by 115 basis points or bps since the end of March to cushion the impact of the coronavirus crisis and radical blocks to control its spread. However, inflation has been consistently above the upper limit of the 2% -6% target range required by the RBI every month except March this year, and core inflation also remains sticky.

Das also said that the Permanent Marginal Facility (MSF) rate and the bank rate were unchanged at 4.25%. The central bank also changed its target for real GDP for fiscal year 21, predicting the economy to contract 7.5% from a previous estimate of a 9.5% contraction. “Real GDP growth for fiscal year 21 is projected at -7.5% versus -9.5% projected previously and the second quarter of fiscal year 21 is expected to show positive GDP growth,” Das said.

The Indian economy, which contracted 23.9% in the first quarter of 2020-21 mainly due to a national lockdown due to the Covid-19 pandemic, saw some improvement in the second quarter as the contraction slowed to 7.5%. However, retail inflation continued its upward streak for the ninth consecutive month to hit 7.61% in October, the highest since May 2014.

Das said on Friday that the MPC expects this trend to persist and that the inflation outlook has turned “adverse.” The MPC expects inflation in the current quarter to be 6.8% before cooling slightly to 5.8% in the January-March quarter. Das also noted that consumer confidence for next year has turned positive.

The RBI had last revised its policy rate on May 22, in an off-policy cycle to stimulate demand by lowering the interest rate to a record low. The 26th rate setting MPC meeting with three external members – Ashima Goyal, Jayanth R Varma and Shashanka Bhide – started on December 2. This is the second meeting of the members, who are appointed for a four-year term.

The government transferred the interest rate setting function from the RBI governor to the six-member MPC in 2016. Half of the panel, which is headed by the governor, is made up of independent outside members.

MPC was mandated to maintain annual inflation at 4% until March 31 of next year with an upper tolerance of 6% and a lower tolerance of 2%.

(With contributions from the agency)

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