RBI keeps policy rates unchanged, cuts FY22 GDP growth forecast to 9.5%

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) having taken stock of the evolving macroeconomic and financial conditions as well as the impact of the second wave of the pandemic on Friday voted unanimously to maintain status quo, keeping the policy repo rate unchanged at 4%.

The MPC also decided unanimously to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.

 

The marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25%. The reverse repo rate also remains unchanged at 3.35%.

In his statement, RBI Governor Shaktikanta Das said though the GDP growth in FY21 contracted to 7.3%, the forecast of a normal south-west monsoon, the resilience of agriculture and the farm economy, the adoption of COVID compatible operational models by businesses, and the gathering momentum of global recovery are forces that can provide tailwinds to revival of domestic economic activity when the second wave abates.

 

On the other hand, he said the spread of COVID-19 infections in rural areas and the dent on urban demand pose downside risks.

“Ramping up the vaccination drive and bridging the gaps in healthcare infrastructure and vital medical supplies can mitigate the pandemic’s devastation,” he added.

He said the inflation print for April at 4.3% has brought with it some relief and policy elbow room. A normal south-west monsoon along with comfortable buffer stocks should help to keep cereal price pressures in check.

 

On the other hand, the rising trajectory of international crude prices within a broad-based surge in international commodity prices and logistics costs is worsening cost conditions. These developments could keep core price pressures elevated, although weak demand conditions may temper the pass-through to consumer inflation.

Stating that rural demand is expected to remain strong he said the increased spread of COVID-19 infections in rural areas, however, poses downside risks.

Taking all factors into consideration, the RBI has now projected real GDP growth at 9.5% in FY22 [from earlier projection of 10.5%] consisting of 18.5 per cent in Q1; 7.9 per cent in Q2; 7.2 per cent in Q3; and 6.6 per cent in Q4 of FY22 emphasizing that upside risks to inflation emanate from persistence of the second wave and consequent restrictions on activity on a virtually pan-India basis, he said insulating prices of essential food items from supply side disruptions will necessitate active monitoring and preparedness for coordinated, calibrated and timely measures by both Centre and states to prevent emergence of supply chain bottlenecks and increase in retail margins.

Taking into consideration all factors, CPI inflation has been projected at 5.1% during FY22: 5.2%in Q1; 5.4% in Q2; 4.7% in Q3; and 5.3% in Q4 of 2021-22, with risks broadly balanced.

Mr. Das said in the year gone by, the RBI had engaged in safeguarding the economy and the financial system from the ravages of the pandemic.

“We have been on continuous vigil – through the first wave; the lull between the waves; and now the second wave. Maintaining financial stability and congenial financing conditions for all stakeholders is a commitment that we have adhered to assiduously,” he said.

He said the sudden rise in COVID-19 infections and fatalities has impaired the nascent recovery that was underway, but has not snuffed it out. ”The impulses of growth are still alive. Aggregate supply conditions have shown resilience in the face of the second wave,” Mr Das said.
 

“We will continue to think and act out of the box, planning for the worst and hoping for the best. The measures announced today, in conjunction with other steps taken so far, are expected to reclaim the growth trajectory from which we have slid,” he said.

Looking ahead, a policy package to consolidate India’s position as vaccine capital of the world with leadership in production of pharma products can change the COVID narrative, he added. The need of the hour, the governor said, is not to be overwhelmed by the current situation, but to collectively overcome it.

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