RBI holds rates, MPC splits on stance

One member votes against staying ‘accommodative’ for as long as necessary to support growth

The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday voted unanimously to keep the repo rate unchanged at 4% as part of the RBI’s sustained effort to help the economy recover from the shock of the COVID-19 pandemic.

One member, however, voted against the MPC’s majority decision to retain the ‘accommodative stance as long as necessary to revive and sustain growth on a durable basis’, while ensuring that ‘inflation remains within the target going forward’, Governor Shaktikanta Das said in a statement.

The central bank retained its projection for real GDP growth in the current fiscal year at 9.5% as it pegged Q1 growth at 21.4% followed by 7.3% in Q2, 6.3% in Q3 and 6.1% in Q4.

The MPC, however, raised its forecast for retail inflation for the year to 5.7%, from the 5.1% pace it had projected in June as the faster-than-expected CPI inflation readings in the first quarter and continuing price pressures forced it to recalibrate projections for the next three quarters: “5.9% in Q2; 5.3% in Q3; and 5.8% in Q4 of 2021-22, with risks broadly balanced”.

“Going forward, 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,” the MPC said in its statement.

“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,” it added, reiterating an exhortation it has been repeatedly making to the governments.

“We are in a much better position than at the time of the MPC’s meeting in June 2021,” Mr. Das said, announcing the policy decision. “As the second wave of the pandemic ebbs, containment eases and we slowly build back, vaccine manufacturing and administration are steadily rising.

“Yet the need of the hour is not to drop our guard and to remain vigilant against any possibility of a third wave, especially in the background of rising infections in certain parts of the country,” he added.

‘Conditions still weak’

Mr. Das said the outlook for aggregate demand was improving, but the underlying conditions were still weak.

“Aggregate supply is also lagging below pre-pandemic levels. While several steps have been taken to ease supply constraints, more needs to be done to restore supply-demand balance in a number of sectors of the economy,” he stressed.

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