The Reserve Bank of India once again chose to leave its key policy interest rates unchanged because of elevated inflation but persisted with an accommodative policy without devising any new measures or instruments to soak up the excess liquidity sloshing around in the system.

“The monetary policy committee decided to maintain status quo on the policy rate and continue with the accommodative stance as long as necessary — at least during the current financial year and into the next— to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy,” the RBI said in a statement.

Since the pandemic hit the economy in March, the RBI has cut the repo rate by 115 basis points.

The repo rate, at which banks borrow short-term money from the RBI, will remain at 4 per cent. The reverse repo, at which they park excess funds with the central bank, will stay pegged at 3.35 per cent.

The RBI acknowledged the need to manage the surge in domestic liquidity arising from strong foreign capital flows.

“Surges of capital flows have flooded into India. The RBI has been taking measures to dampen volatility and enable orderly evolution of the exchange rate... the injections of liquidity through forex interventions are being sterilised by absorptions through the reverse repo,” Das said.

The pressure to soak up liquidity would probably explain why the policy makers chose not to tinker with the reverse repo rate; a cut may dissuade banks from parking excess funds with the RBI which could potentially destabilise bond yields. Surplus liquidity of more than Rs 5 lakh crore has driven down interest rates for short-term government bonds and corporate commercial paper, with some instruments being issued below the repo and reverse repo.

Growth outlook revised

However, the policymakers — who have stayed pat on interest rates since May 22 — revised their outlook for the pandemic-ravaged economy by forecasting a slightly less pessimistic contraction of 7.5 per cent this fiscal. Back in October, it had projected a contraction of 9.5 per cent.

The central bank’s wise men had said in their November bulletin that the economic revival would start sooner in the third quarter. They have now backed up that forecast with a number: they expect to see a 0.1 per cent growth in the third quarter ending December 31 and 0.7 per cent in the fourth quarter ending March 31.

For the first half of the next fiscal, growth has been projected in a wide range of 6.5 per cent to 21.9 per cent.

But inflation remains the big worry as the outlook “had turned adverse relative to expectations in the last two months”.

Retail inflation in the third quarter has been projected at 6.8 per cent, down from 7.61 per cent now — a six-year high. At the October review, the policy makers had expected inflation to cool because of a base effect.

The statement said inflation in the fourth quarter would taper down to 5.8 per cent, just below its tolerance limit of 6 per cent on the upside of its policy mandate. Inflation in the first half of next year will remain sticky with the forecast set at a range between 4.6 and 5.2 per cent.

Stocks at all-time high

Equity benchmarks led by rate sensitive stocks rallied to record highs on Friday. Breaching the 45000-mark for the first time, the Sensex surged 446.90 points, or 1 per cent, to finish at 45079.55. Intraday, it touched a lifetime peak of 45148.28.

Similarly, the broader NSE Nifty touched a new high of 13280.05 during the session, before finishing 124.65 points or 0.95 per cent higher at 13258.55 — its record closing high.

FM view

Finance Minister Nirmala Sitharaman said she was not worried about the current high level of inflation as it is seasonal in nature. “Rise in prices in commodities are largely seasonal. The government is very frequently looking at changes and taking conscious calls for imports, and sorting out logistical issues. The blip in inflation will ease out. I don’t see food item inflation continuing,” she said at a media event.

Outgoing Ficci president Sangita Reddy said: “There has been a substantial upgrade to the overall growth forecast for the second half of the current fiscal. This is encouraging but given the stress the economy had faced, we anticipate policy support, both from the RBI and the government, will be required well into the next year.”