Caught between slowing growth and inflationary pressures, the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) stayed put on policy rates in today’s meeting. It also continued with its accommodative stance “as long as necessary” to support growth. Deploying an expanded set of tools to support financial conditions in the economy, including interventions in bond and foreign exchange markets, it continued with its targeted support approach to the most stressed segments. The current policy extends help to a greater number of vulnerable services.
Monetary policy space to support growth has become more limited, given the persisting risks to inflation from surging commodity prices. While consumer price index (CPI)-based inflation remains within the target range for now, the MPC will remain watchful of pass-through from rising input costs. While this will restrain the RBI from making major policy changes, it is likely to continue using targeted instruments to maintain conducive financial conditions.
Key takeaways from the June 4 meet
The MPC unanimously voted to keep policy rates unchanged, with the repo rate at 4%, reverse repo at 3.35%, and marginal standing facility at 4.25%
It also maintained its accommodative stance, also unanimously, “as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring inflation remains within the target going forward”
The need to continue monetary support was felt, given the economy faces another blow from the second Covid-19 wave
The MPC cut the GDP growth forecast by 100 basis points (bps) to 9.5% in fiscal 2022
It acknowledged the pressures on CPI inflation from rising commodity prices, and revised up its forecast to 5.1% for fiscal 2022 from 5% previously
The RBI announced more bond purchases under the government securities acquisition program (GSAP), one tranche for the current quarter, and higher purchases for the second quarter of this fiscal
On-tap window of liquidity for contact-based services was announced as an attempt to address rising dichotomies in the economy
