New Delhi: The Reserve Bank of India (RBI) kept rates steady at record low levels as expected on Friday and said it would maintain support for the economy’s recovery from the pandemic by ensuring ample liquidity for markets to absorb a massive government borrowing programme.
“Going forward, the Indian economy is poised to move in only one direction and that is upwards. It is our strong conviction, backed by forecasts, that in 2021/22, we would undo the damage that COVID-19 has inflicted on the economy,” RBI governor Shaktikanta Das said after announcing the rate decision.
The repo rate or RBI‘s key lending rate was held at 4% while the reverse repo rate or its borrowing rate was left unchanged at 3.35%.
The repo rate has been cut by a total 115 basis points since March 2020 to cushion the shock from the coronavirus pandemic, following a 135 bps reduction since beginning of 2019.
Das said the six members of the monetary policy committee (MPC) were unanimous in their decision to keep rates on hold.
He said that the economy’s growth outlook had improved and that inflation was expected to remain within the RBI‘s targeted range over the next few quarters.
“Given that inflation has returned within the tolerance band, the MPC judged that the need of the hour is to continue to support growth, assuage the impact of COVID-19 and return the economy to a higher growth trajectory,” Das said.
Inflation readings over the last two months have been better than the MPC had expected when it met in December, Das said while stressing that price stability remains the foundation on which the economy can reach its potential.
“Outlook on growth has improved significantly with positive growth impulses becoming more broad-based and the rollout of the vaccination program in the country auguring well for the end of the pandemic,” he added.
With the economy bouncing back from a low base after this pandemic stricken year, the MPC has projected GDP growth of 10.5% for the fiscal year starting April. This is lower than that of the Economic Survey that projected India to grow at a rate of 11% in the coming fiscal.
After a severe contraction in the June quarter showed India had been one of the major economies hit hardest by the pandemic, a pick up in manufacturing resulted in a much smaller contraction in the September quarter.
The MPC saw retail inflation running at 5.2% in the current quarter, and expected it to be between “5.2% to 5.0%” in the six months from April through September.
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Government’s borrowing programme
Das said the recent budget proposals and expenditure plans have raised hopes for a more robust recovery, and the bank stood ready to offer support and also ensure that the government’s Rs 12.06 lakh crore ($165.42 billion) borrowing programme for the coming fiscal year was absorbed smoothly by the market.
Das announced that the central bank will provide retail investors with direct access to the government securities (G-secs) (government bonds etc) market, both primary and secondary markets, Mint reported. It’s being called Retail Direct.
As per reports, investing in G-secs is a safer alternative than bank fixed deposits as G-secs come with a sovereign guarantee.
Das also said that the roadmap for the scheme will be announced separately.
However, bond yields surged to their highest in more than five months on Friday as traders expressed their disappointment with the RBI for not announcing a concrete bond buyback calendar to absorb additional market borrowing.
The benchmark 10-year bond yield rose as high as 6.19% after the policy, its highest level since end-August but ended the session at 6.15%, up 5 basis points on the day.
Neeraj Gambhir, president, head treasury and markets at Axis Bank told CNBC TV-18, “…I think the market is nervous about how this large government borrowing programme is going to get absorbed, and what is the kind of support that will be required from RBI going forward. All right things said, I think the markets are still somewhat nervous and that’s getting reflected in the prices.”
Cash reserve ratio
According to CNBC-TV18, the central bank announced restoration of cash reserve ratio (CRR) in two phases beginning March 2021.
CRR is the share of a bank’s total deposit that is parked with the RBI on a permanent basis in the form of liquid cash. Banks earn no interest on CRR.
According to the report, the CRR restoration will start at 3.5% with effect March 27 and 4% with effect May 22, 2021.
To improve liquidity in the system during the COVID-19 pandemic, the central bank had reduced CRR to 3% effective March 2020, for a period of one year.
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Expert opinion
“Importantly, the RBI talked about supporting growth,” said Kunal Kundu, India economist at Societe Generale.
“We would likely see the RBI coming to the aid of the government, even in the fiscal space either by opting for debt monetisation or sharing a portion of their excess reserves.”
The blue chip Nifty 50 index was largely unchanged while the S&P BSE Sensex was up 0.59% after the central bank kept key rates steady.
The rupee strengthened marginally to 72.91 against the dollar, while the benchmark 10-year bond yield rose to 6.15% compared to its previous close of 6.10%.
(With inputs from Reuters)