Borrowing costs

Monetary policy meeting: RBI declares intention to keep borrowing costs low for government and businesses

The Reserve Bank of India (RBI) on Friday said it intended to keep borrowing costs low for government and businesses by buying more bonds in the market, although it left policy interest rates unchanged and policy direction to heal a fragile economy. a global commodity price spiral.

Growth forecasts for FY22 were revised down one percentage point to 9.5% and inflation expectations were raised amid supply-side disruptions, signaling that the road to recovery could be bumpy.

The decisions were in line with expectations. An ET poll showed there would be a status quo on rates and position, and a possibility of lower growth projections.

The central bank increased its bond purchases under the Government Securities Acquisition Program from Rs. 20,000 crore, or 20%, to Rs. 1.2 lakh crore to ease bond market concerns after several bids vested in primary traders over the past few months as investors seek higher yields.

Governor Shaktikanta Das vowed to follow the path that would ensure the economy recovers strongly and stabilizes before the central bank does anything to change its accommodative monetary stance.

“The Reserve Bank will continue to use all instruments at its disposal and work to revive and sustain growth on a sustainable basis,” Das said. “The MPC was of the view that at this point political support from all sides is needed to regain the growth momentum that was evident in the second half of last fiscal year and to nurture the recovery after it took hold. root. ”

The RBI and the Monetary Policy Committee (MPC) have been juggling the need to revive economic growth after Covid ravaged businesses and at the same time mounting price pressures due to bottlenecks on the l ‘offer. In addition, huge global liquidity triggered a sharp rise in commodity prices, threatening the MPC’s ability to meet the inflation target in the upper upper 6% range.

The MPC voted unanimously to keep the repo rate, the rate at which RBI lends to banks, at 4% and the accommodative monetary stance. The reverse repo rate, the rate that RBI pays banks for parking excess funds, remains at 3.35%.

All other rates remain unchanged.

“Hand-eye coordination of monetary policy is becoming increasingly complicated as the second wave affecting growth comes at a time of mounting inflationary pressures,” said Aurodeep Nandi, economist at Nomura Securities. “The RBI’s policy actions were largely in line with expectations – keeping the three levers – rates, stance and forward guidance unchanged and dovish, while relying on G-SAP as a tool to deliver more accommodation and to prevent any premature tightening of financial conditions. ”

The central bank lowered the GDP forecast by one percentage point for this fiscal year to 9.5%, from 10.5% previously expected, as the second wave of Covid-19 led various states to announce shutdowns.

“The increased spread of COVID-19 infections in rural areas, however, poses downside risks,” Das said. The inflation projection is 5.1%, well above the rough target of 4%.

While a lower growth rate and higher inflation pose a challenge to monetary authorities who have been mandated with a goal, the RBI has said its main objective at this stage is to revive growth. Thus, he would pursue an accommodating monetary policy and would not hesitate to make it easier.

It improved quantitative easing through government securities acquisition program or G-SAP to Rs. 1.2 lakh crore in the second quarter, from Rs. 1 lakh crore in the first.

“As the second wave intensifies this fiscal year, the Reserve Bank’s focus is increasingly shifting from systemic liquidity to its equitable distribution,” Das said. “In fact, the enduring lesson of the pandemic experience in the Indian context has been the deployment of unconventional monetary policy measures that distribute liquidity among all stakeholders. We will continue our proactive and preventive approach.”