HYDERABAD: The RBI Thursday kept key policy rates including repo rate unchanged at 5.15 per cent. The Monetary Policy Committee (MPC) unanimously decided to maintain status-quo underscoring that the inflation outlook remains uncertain.
Given that inflation surged above the upper tolerance band in the previous quarter, primarily on the back of the unusual spike in onion prices, the central bank noted that the trend may continue during the current quarter. It thus revised its inflation forecast to 6.5 per cent, well above the central bank's mandated 2-6 per cent, inflation band. However, inflation is expected to subsise to 5.4-5 per cent in the first half of the next fiscal and 3.2 per cent in the second half of FY21.
During the second quarter of FY20, actual inflation overshot the central bank's projections by 70 bps at 5.8 per cent, largely due to the intensification of the onion price shock in December 2019 on account of unseasonal rains in October-November.
Even as the MPC recognized India's weakening growth, it preferred to pause in order to assess the impact of the recent government measures to stimulate the economy.
In other words, the central bank reiterated that it prefers to keep a firm handle on inflation, rather than gunning for growth, which in any case is the government's prerogative. GDP growth for FY21 is projected at 6 per cent, including 5.5-6.0 per cent in H1 and 6.2 per cent in Q3.
Perhaps assessing the Budget's fiscal policy that invoked the FRBM's escape clause to relax fiscal deficit by 50 bps in FY20, the six-member MPC's may have factored in the additional inflationary element that could creep into the system. Technically, invoking the escape clause may imply RBI monetizing the fiscal deficit, where the central bank buys government bonds. In other words, the central bank may print new currency, which could influence inflation.
As such, the repo rate, the rate at which banks borrow from the central bank, stands at 5.15 per cent, while the reverse repo rate too remains unchanged at 4.90 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 5.40 per cent.
"Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain the status quo. Accordingly, the MPC decided to keep the policy repo rate unchanged and persevere with the accommodative stance as long as necessary to revive growth, while ensuring that inflation remains within the target," the MPC noted.
Overall liquidity in the system remained in surplus at over Rs 3 lakh crore. For borrowers, though, the RBI hoped that linking of loans to external benchmark and transmission of its earlier rate reductions will work their way into the market.
"Monetary transmission across various money market segments and the private corporate bond market has been sizable. As against the cumulative reduction in the policy repo rate by 135 bps since February 2019, transmission to various money and corporate debt market segments up to January 31, 2020 ranged from 146 bps (overnight call money market) to 190 bps (3-month CPs of non-banking finance companies)," it said.