For 6th time in a row, RBI leaves key rate unchanged, lowers GDP to 9.5%

The Reserve Bank of India on Friday decided to leave benchmark interest rate unchanged at 4 per cent but maintained an accommodative stance as the economy faces heat of the second Covid wave.

This is the sixth time in a row that the Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das has maintained status quo. RBI had last revised its policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting interest rate to a historic low.

MPC decided to maintain status quo, that is keeping benchmark repurchase (repo) rate at 4 per cent, Das said while announcing the bi-monthly monetary policy review on Friday.

Consequently, the reverse repo rate will also continue to earn 3.35 per cent for banks for their deposits kept with RBI.

Das said MPC voted unanimously for keeping interest rate unchanged and decided to continue with its accommodative stance as long as necessary to support growth and keep inflation within the target.

The central bank lowered its estimate for economic growth to 9.5 per cent for the current fiscal from earlier projection of 10.5 per cent due to the impact of the second Covid wave.

This is the first MPC meeting after official data showed that Indian economy contracted 7.3 per cent in the last fiscal, weighed down by nationwide lockdown that pummelled consumption and halted most economic activities.

With regard to inflation, the governor said that retail inflation is likely to be 5.1 per cent during the current fiscal.

MPC has been given the mandate to maintain annual inflation at 4 per cent until March 31, 2026, with an upper tolerance of 6 per cent and a lower tolerance of 2 per cent.

RBI lowers FY22 GDP growth projection to 9.5%

The RBI on Friday lowered the country's growth projection for the current financial year to 9.5 per cent from 10.5 per cent estimated earlier, amid uncertainties created by the second wave of the coronavirus pandemic.

Addressing the media after the meeting of the Monetary Policy Committee, Governor Das said the sudden rise in Covid-19 infections, and fatalities has impaired the near nascent recovery that was underway, but has not snuffed it out.

The impulses of growth are still alive, he said, and added that the aggregate supply conditions have shown resilience in the face of the second wave.

The RBI governor said the bank will "continue to think and act out of the box", planning for the worst and hoping for the best.

Das further said the measures announced on Friday, in conjunction with other steps taken so far are expected to reclaim the growth trajectory from which "we have slid".

In April, the Reserve Bank had projected the real GDP growth for 2021-22 at 10.5 per cent.

India's economy had contracted by less-than-expected 7.3 per cent in the fiscal year ended March 2021, after growth rate picked up in the fourth quarter. The gross domestic product (GDP) grew by 1.6 per cent in the January-March period, up from 0.5 per cent in the previous quarter.

"... real GDP growth is now projected at 9.5 per cent in 2021-22 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 2021-22," the governor said.

RBI to buy G-Secs worth Rs 1 lakh crores

The RBI on Friday said it will initiate a secondary market government securities acquisition programme or G-SAP 2.0 worth Rs 1.20 lakh crore in the second quarter of this fiscal to enable an orderly evolution of the yield curve.

Under G-SAP 1.0, the central bank will purchase Rs 1 lakh crore-worth government securities and the last transaction of such acquisition to the tune of Rs 40,000 crore is scheduled for June 17.

"In my statement of April 7, 2021, I had indicated that in addition to G-SAP, the Reserve Bank will continue to deploy regular operations under the LAF (Liquidity Adjustment Facility), longer-term repo/reverse repo auctions, forex operations and open market operations, including special OMOs (Open Market Operations), to ensure that liquidity conditions evolve in consonance with the stance of monetary policy and financial conditions remain supportive for all stakeholders," Governor Das said on Friday.

So far this fiscal, Das said RBI has undertaken regular OMOs and injected an additional liquidity to the tune of Rs 36,545 crore (up to May 31) in addition to Rs 60,000 crore under G-SAP 1.0.

"A purchase and sale auction under operation twist has also been conducted on May 6, 2021 to facilitate the smooth evolution of the yield curve. Going forward, the Reserve Bank will continue to conduct regular operations for liquidity management," he said.

Taking these developments into account, Das said it has now been decided that another operation under G-SAP 1.0 for purchase of G-Secs of Rs 40,000 crore will be conducted on June 17, 2021

Of this, Rs 10,000 crore would constitute purchase of State Development Loans (SDLs).

"It has also been decided to undertake G-SAP 2.0 in Q2:2021-22 and conduct secondary market purchase operations of Rs 1.20 lakh crore to support the market. The specific dates and securities under G-SAP 2.0 operations will be indicated separately. We do expect the market to respond appropriately to this announcement of G-SAP 2.0," he said.

To support growth that has been hit by the coronavirus pandemic, the government has planned a large borrowing of Rs 12.05 lakh crore in the financial year ending March 31, 2022.

As a result, the fiscal deficit is expected to be 6.8 per cent of GDP, down from 9.3 per cent in the last fiscal.

Das also said RBI has been taking several measures to encourage investments by Foreign Portfolio Investors (FPIs) in the Indian debt market such as introduction of new channels for investment and periodic review of the operational framework in place for investments by non-residents.

"With a view to easing operational constraints faced by FPIs and promoting ease of doing business, it has been decided to permit Authorised Dealer banks to place margins on behalf of their FPI clients for their transactions in government securities (including State Development Loans and Treasury Bills), within the credit risk management framework of banks," he said.

RBI see retail inflation at 5.1%

The RBI on Friday projected the retail inflation at 5.1 per cent in the current financial year ending March 31, 2022.

The projection is well within the Monetary Policy Committee's target to keep the rate of inflation at 4 per cent with an upper or lower tolerance level of 2 per cent.

Taking into consideration the measures taken so far as well as the upside risks, Das said the CPI (Consumer Price Index) inflation is projected at 5.1 per cent during 2021-22.

This consists of 5.2 per cent in the first quarter, 5.4 per cent in the second quarter, 4.7 per cent in the third quarter and 5.3 per cent in the fourth quarter of this fiscal, with risks broadly balanced, he said.

According to Das, upside risks to inflation emanates from persistence of second COVID wave and consequent restrictions on activity on a virtually pan-India basis.

"In such a scenario, 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 state governments to prevent emergence of supply side bottlenecks and increase in retail margins," the governor said.

India’s forex reserves at $60 billion

Governor Das said India's forex reserves may have crossed record level of USD 600 billion on the back of robust capital flows.

  As per the RBI's data issued on May 28, the country's foreign exchange reserves rose by USD 2.865 billion to a record high of USD 592.894 billion for the week ended May 21, boosted by gold and currency assets.

"Based on the current estimation, we believe that our forex reserves may have crossed USD 600 billion," he said while announcing the bi-monthly monetary policy review.