RBI Announces Status Quo on Key Policy Rates

RBI Announces Status Quo on Key Policy Rates
06/02/2021 , by , in News/Views

The Reserve Bank of India (RBI) announced a status quo in key policy rates while forecasting a 10.5 per cent economic growth for the next fiscal. The repo rate has been retained at 4 per cent.

 The decision of the six-member monetary policy committee, which is headed by the RBI Governor, was unanimous. The monetary policy committee has also retained the accommodative stance “as long as necessary”. This is the last bi-monthly policy for the current fiscal year.

“Inflation outcomes have been better than expected. Inflation has eased below the upper tolerance level of 6 per cent,” RBI Governor Shaktikanta Das said in a video address. He added that the committee is of the view that it is important to revive growth on a durable basis while ensuring inflation remains within the targeted levels.

 The decision to hold rates comes at a time the retail inflation has decelerated since December on account of a fall in food prices but core inflation continues to remain elevated.  In December, retail inflation had fallen to 4.59 per cent from 6.73 per cent in November. However, core inflation has remained elevated at 5.65 per cent as against 5.84 per cent in the previous month limiting the space available for the central bank to cut rates to support a revival.

 The move also comes days after Finance Minister Nirmala Sitharaman presented her growth oriented budget aimed at reviving the economy that is set to register a record contraction in the current fiscal.  The sharp increase in the fiscal deficit both for the current fiscal and the next fiscal limits the space for rate cuts. India’s fiscal deficit is projected at 9.5 per cent of gross domestic product in 2020-21 and at 6.8 per cent in 2021-22 and could add to inflationary pressures in the coming months.

The government has budgeted substantially higher market borrowings pegged at Rs 12.7 lakh crore and at Rs 9.67 lakh crore in 2020-21 and 2021-22, respectively, which are expected to drive up bond yields and make it expensive for the private sector to borrow.

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