RBI keeps policy rates unchanged, but halts unconventional measures

The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) kept its policy rates and accommodative stance unchanged in today’s meeting. It stopped short of announcing a new set of liquidity-enhancing measures for the first time since the onset of the Covid-19 pandemic. It did not extend the government security (G-sec) acquisition programme (GSAP), and announced greater absorption of liquidity under upcoming variable rate reverse repo operations (VRRRs). The RBI is comforted by signs of strengthening economic recovery, while being mindful of supply-driven risks to inflation and the need to maintain financial stability.

Like many other central banks, the RBI is signalling a gradual move towards ‘normalising’ its monetary policy as the economy emerges from the shadow of the second wave. It is likely to first halt the unconventional easing measures it announced amid the pandemic. We expect this normalisation to continue in the coming months and a hike in the repo rate by 25 basis points by fiscal 2022-end, assuming strengthening economic recovery and elevated inflation risks.

Key takeaways from today’s monetary policy meeting

• The MPC voted unanimously to keep the repo rate unchanged at 4%. Status quo was also maintained on the reverse repo at 3.35% and marginal standing facility at 4.25%
• It voted to maintain its accommodative stance, with a 5-1 majority, same as the outcome of the August meeting
• It did not announce any new purchases under GSAP, after the Rs 2 lakh crore of purchases between April and September
• It announced further increase in liquidity absorption under VRRRs, from Rs 4 lakh crore at present to Rs 6 lakh crore by December 2021
• It retained the forecast for gross domestic product (GDP) growth at 9.5% for this fiscal
• It cut the projection for consumer price index (CPI)-based inflation to 5.3% from 5.7% for this fiscal