Monetary Policy Highlights: Rates Stay On Hold To Support 'Nascent, Hesitant' Recovery
India’s six-member Monetary Policy Committee kept interest rates unchanged for the seventh straight meet. Calling the recovery "tentative" and "nascent" and inflation "exogenous" and "largely temporary", the MPC and the central bank laid the path for continued monetary policy accommodation.
Following its third review of the current financial year, the MPC voted unanimously to keep the policy repo rate unchanged at 4%.
The stance remained accommodative, albeit with a 5:1 majority.
The committee guided that the "accommodative stance would be maintained as long as necessary to revive and sustain growth on a durable basis, while ensuring that inflation remains within the target going forward."
Since the start of the pandemic, the MPC has prioritised the revival of growth to mitigate the impact of the pandemic. Available data point to exogenous and largely temporary supply shocks, driving the inflation process, validating the MPC’s decision to look through inflation. A preemptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions.Shaktikanta Das, Governor, RBI
The repo rate was last reduced in May 2020, making this the longest stretch of status quo in the benchmark policy rate over at least the last twenty years.
The central bank, which controls the reverse repo rate separately, decided to keep it unchanged at 3.35%.
All 27 economists polled by Bloomberg expected the central bank to maintain a status quo on rates.
First Signs Of Dissent
All members except Jayanth R. Varma, voted to continue with the accommodative stance.
In his minutes in the previous MPC meet as well, Varma had said that the MPC must be sensitive to the risk that inflation expectations could become entrenched if inflation remains elevated for too long. To maintain and enhance it's hard earned credibility, the MPC needs to remain data driven so that it can respond rapidly and adequately to any unforeseen shocks that may arise in future, Varma had said.
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Domestic economic activity is starting to recover with the ebbing of the second wave.
Looking ahead, agricultural production and rural demand are expected to remain resilient. Urban demand is likely to mend with a lag as manufacturing and non-contact intensive services resume on a stronger pace, and the release of pent-up demand acquires a durable character with an accelerated pace of vaccination.
Buoyant exports, the expected pick-up in government expenditure, including capital expenditure, and the recent economic package announced by the Government will provide further impetus to aggregate demand.
Although investment demand is still anemic, improving capacity utilisation and congenial monetary and financial conditions are preparing the ground for a long-awaited revival.
Taking all these factors into consideration, projection for real GDP growth is retained at 9.5% in FY22 consisting of 21.4% in Q1; 7.3% in Q2; 6.3% in Q3; and 6.1% in Q4 of FY22. Real GDP growth for Q1FY23 is projected at 17.2%.MPC Resolution
Inflation at 6.26% in June remained above the MPC's target range of 4(+/-2)% for the second straight month. Inflation will remain close to the upper tolerance band up to Q2FY22, but these pressures should ebb in the third quarter of FY22 on account of kharif harvest arrivals and as supply side measures take effect.
The revival of south-west monsoon and the pick-up in kharif sowing, buffered by adequate food stocks should help to control cereal price pressures.
High frequency indicators suggest some softening of price pressures in edible oils and pulses in July in response to supply side interventions by the government.
Input prices are rising across manufacturing and services sectors, but weak demand and efforts towards cost cutting are tempering the pass-through to output prices.
With crude oil prices at elevated levels, a calibrated reduction of the indirect tax component of pump prices by the Centre and states can help to substantially lessen cost pressures.
Taking into consideration all these factors, CPI inflation is projected at 5.7% during FY22, at 5.9% in Q2, 5.3% in Q3 and 5.8% in Q4, with risks broadly balanced.MPC Resolution
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