A dovish Reserve Bank of India (RBI) on Wednesday kept its key rates unchanged and retained its accommodative stance as growth revival remained an “overarching’’ priority amid uncertainty over the Omicron variant.
The central bank also did not come up with a clear-cut guidance on policy normalisation even as it announced minor steps to suck out excess liquidity from the system.
At the end of a three-day meeting, the six-member monetary policy committee (MPC) went along expected lines and unanimously voted to keep the policy repo rate unchanged at four per cent.
Five MPC members were in favour of maintaining the accommodative stance barring Jayant Varma who had also dissented from the others in the previous meeting.
In another relief to the markets, the MPC did not tinker with the reverse repo rate — the interest at which banks park surplus cash with the RBI — which remains at 3.35 per cent.
RBI governor Shaktikanta Das said though activity in the various segments of the economy has surpassed the pre-pandemic levels, it was lagging behind in certain key segments such as private investment, consumption and a few other sectors that are critical to the growth of the economy.
He added the domestic economy is facing global headwinds such as volatility in crude oil prices .
“Given the slack in the economy and the ongoing catching-up of activity, especially of private consumption, which is still below its pre-pandemic levels, continued policy support is warranted for a durable and broad-based recovery. Against this backdrop, the MPC decided to retain the prevailing repo rate at four per cent and continue with the accommodative stance,’’ he said .
While the RBI maintained the real GDP growth projection at 9.5 per cent for 2021-22, its forecast on inflation was lower than market expectations. It is expected headline inflation will peak in the fourth quarter of 2021-22 and soften thereafter.
The dovish forecast on inflation runs contrary to the challenges on this front faced by developed economies such as the US. Das said it was unfair to compare inflation in India with advanced economies. The central bank is mindful and cognizant of the requirement to maintain price and financial stability.
“As an inflation targeting central bank which also has various other responsibilities, RBI looks at whole lot of other things.. the RBI is in sync with how the evolving growth inflation dynamics are playing out,’’ he said.
Aditi Nayar, chief economist, Icra said while a subtle shift has been brought in with the comment that price stability remains the cardinal principle of monetary policy, the overarching tone of Das’s statement is less hawkish than what they had anticipated.
“The comment on managing a durable, strong, as well as inclusive recovery, underscores concerns of a K-shaped trend underpinning the traction in economic growth.”
“With the MPC remarking that the ongoing domestic recovery needs sustained policy support to make it more broad-based, we now foresee a slightly lower likelihood of our base case assessment that the stance will be changed to neutral in the February 2022 policy review,’’ she said.