The Reserve Bank of India (RBI) on Thursday kept the key rates unchanged and maintained an accommodative stand since a broad-based growth continued to elude the domestic economy.
After a three-day meeting, the six member monetary policy committee (MPC) retained not only the policy repo rate which impacts home and auto loans at 4 per cent but also the reverse repo rate at 3.35 per cent.
RBI’s ultradovish stand goes against the hawkish moves of some of its peers such as the US Federal Reserve and the Bank of England.
The RBI surprised analysts both in keeping the reverse repo rate unchanged and in forecasting lower than expected inflation numbers after March 2021.
While retaining the inflation projection for 2021-22 at 5.3 per cent, the RBI said the fourth quarter print would be 5.7 per cent. This is expected to decline assuming a normal monsoon. Accordingly, CPI inflation for 202223 has been forecast at 4.5 per cent.
RBI governor Shaktikanta Das said the central bank had done a rigorous analysis before making the forecast. “On inflation we have done our homework and very detailed analysis have been done internally and based on our analysis we have given the projections of 4.5 per cent… All uncomfortable questions or uncomfortable risks have been duly assessed’’.
He did not reveal the assumption of crude prices in the inflation forecast, saying this will be known in its monetary policy report in April.
Commenting on the contrary approach taken by the RBI compared with the Fed or the Bank of England, deputy governor Michael Patra said the character of inflation in India was different from that in the US or Europe.
Recovery in domestic activity is yet to be broadbased as private consumption and the output of contact intensive services remain below prepandemic levels, the RBI said.
“We are living in a world of Knightian uncertainty in the absence of determinate knowledge about the next mutation of Covid19.” In economics, Knightian uncertainty is a lack of any quantifiable knowledge about some possible occurrence, as opposed to quantifiable risk. The phenomenon is named after Frank Knight (18851972), an economist from the University of Chicago whose seminal work Risk, Uncertainty and Profit was published in 1921.
Das said that future decisions of the RBI will be calibrated
Abheek Barua, chief economist, HDFC Bank, said it was largely along expected lines with a clear emphasis on ensuring the economy is on a path of durable growth recovery. “It showed a clear tilt towards growth and a view that inflation, where elevated, is driven more by the supply disruptions rather than entrenched demand side pressures.”
“This was the first policy of the calendar year and perhaps sets the tone for the rest of the year. Were that indeed the case, the RBI is likely to follow a gentle approach to the normalisation,” he said.
Sensex up
Benchmark indices today reversed their intraday losses and finished with strong gains following the dovish commentary from the RBI. The BSE Sensex staged a smart turnaround and settled at 58926.03 — a rise of 460.06 points or 0.79 per cent.
The rupee declined 10 paise to close at 74.94 against the dollar. The benchmark 10year bond reacted positively to the accommodative stand, with the yield falling 0.68 per cent to 6.752 per cent.
