RBI maintains key lending rates as high retail inflation persists

Persistently high retail inflation fanned in part due to supply side disruptions along with seasonal factors led the Reserve Bank of India (RBI) to maintain the key lending rates.

Accordingly, the Monetary Policy Committee (MPC) of the central bank (CB) in its penultimate meet for 2020 on Friday, decided to maintain the repo rate - or short-term lending - rate for commercial banks, at 4 per cent.

Besides, the reverse repo rate stands unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the ‘Bank Rate’ at 4.2 per cent. The MPC voted to maintain accommodative stance, thus opening up possibilities for more future rate cuts.

It was broadly expected that the RBI’s MPC might hold rates as recent data showed that retail inflation has been at an elevated level during June.

“The MPC evaluated domestic and global macroeconomic and financial conditions and voted unanimously to leave the policy repo rate unchanged at 4 per cent,” RBI Governor Shaktikanta Das said.

“It also decided to continue with the accommodative stance of monetary policy as long as necessary - at least during the current financial year and into the next year - to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward.”

According to Das, India’s economy is entering into a decisive phase in the fight against the pandemic.

He cited that relative to pre-COVID levels, several high frequency indicators are pointing to the easing of contractions in various sectors of the economy and the emergence of impulses of growth.

“By all indications, the deep contractions of Q1:2020-21 are behind us; silver linings are visible in the flattening of the active caseload curve across the country,” Das said.

“Barring the incidence of a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with its pre-COVID growth trajectory.”

Despite a status quo in key lending rates, the Indian equity indices remained in the green during Friday’s trade session. Acording to analysts, the gains came on the back of the Reserve Bank’s positive outlook along with its decision to maintain the accommodative stance and measures for a liquidity boost.

The S&P BSE Sensex of the Bombay Stock Exchange (BSE) closed at 40,509.49, higher by 326.82 points, or 0.81 per cent, from its previous close.

The Nifty50, on the National Stock Exchange (NSE), closed at 11,914.20, higher by 79.60 points, or 0.67 per cent, from its previous close.

“Nifty after easing at the start of the day, reversed direction and rose following the announcement of MPC meet outcome,” said Deepak Jasani, Head of Retail Research at HDFC Securities.

To maintain comfortable liquidity conditions in the COVID battered economy, the Reserve Bank of India announced the sale and purchase of government securities worth Rs20,000 crore under open market operations (OMOs).

According to RBI Governor, the OMOs worth Rs20,000 crore would be conducted on a date yet to be announced. “Market participants should be assured that in keeping with the monetary policy stance announced today, the RBI will maintain comfortable liquidity conditions and will conduct market operations in the form of outright and special open market operations,” he said.

Indo-Asian News Service