The Reserve Bank of India (RBI) on Friday decided to hold rates and continue with its accommodative stance to help the recovering domestic economy gain more traction but was silent on the timeframe for normalising liquidity conditions after the Centre stunned the markets with a higher-than-expected borrowing programme.

After a three-day meeting, the six-member monetary policy committee (MPC) of the RBI decided unanimously to keep the policy repo rate unchanged at 4 per cent.

Though the central bank did announce some measures, bond markets were disappointed in the absence of a specific timetable for borrowings.

All the members agreed to continue with the accommodative stance as long as necessary — at least during the current financial year and into the next fiscal year to revive growth on a durable basis, while ensuring inflation remains within target.

The meeting of the MPC started a day after the budget announced a Rs 12 lakh crore gross borrowing programme for the next fiscal. The panel whose mandate is to keep retail inflation at 4 per cent with a band of +/-2 per cent got a major relief from data which showed retail inflation at 4.59 per cent in December which was below the upper bound of 6 per cent.

RBI governor Shaktikanta Das said after the MPC meeting systemic liquidity will remain “comfortable” over the coming year.

Bond markets were watching the RBI’s stand on liquidity as it had recently said it would normalise systemic liquidity with the economic and financial conditions stabilising gradually.

The central bank stopped short of saying when it would do such an unwinding, though it did announce a two-phased restoration of the cash reserve ratio (CRR) that got reduced by 100 basis points last year.
Das said the high-speed indicators tracked by the RBI have shown a growth in demand, an indication the revival in the economy is not solely on account of pent-up demand. Consumer demand has moved from being pent-up to actual and as people’s movements return to normality, there will be sustained demand.
The MPC has forecast real GDP growth at 10.5 per cent in 2021-22: growth in the first half will be in the range of 8.3 per cent to 26.2 per cent and will be around 6 per cent from the third quarter. On inflation, the RBI governor said vegetable prices will remain soft in the near-term, while pressures may continue to persist on certain food items.

Petroleum prices have reached historic highs because of a surge in international crude oil rates and high indirect taxes imposed both by the Centre and the states. This along with a sharp increase in industrial raw material prices have resulted in broad-based increase in prices of services and manufacturing. “Going forward, concerted policy action by both Centre and states, is critical to ensure that the ongoing cost build-up does not escalate further,’’ Das said.

The panel revised CPI inflation estimates to 5.2 per cent in the current quarter of this fiscal from 5.8 per cent earlier and projected it will come between 5.2 per cent and 5 per cent in the first half of next fiscal and 4.3 per cent in the third quarter with risks broadly balanced.