MPC Maintains Status Quo On Rates; CRR Cut To Be Reversed

February 5, 2021 0 By boss

India’s Monetary Policy Committee kept its key policy rate unchanged even as inflation fell to within its comfort band. The committee maintained an accommodative stance but said it awaits incoming data on inflation.

The RBI, however, announced a two-phase normalisation of the 100-basis-point cut in the cash reserve ratio announced when the Covid crisis hit. The CRR will rise from 3% now to 4% between March and May.

After the review, the MPC voted unanimously to keep the repo rate unchanged at 4% for the fourth straight meet since May. All members also voted in favour of an accommodative stance. The central bank that controls the reverse repo rate separately decided to keep it unchanged at 3.35%.

A Bloomberg poll of 32 economists showed that five expected a rate cut while the remaining expected a status quo. The repo rate has been cut by 115 basis points since the pandemic hit in March.

In his statement announcing the MPC’s resolution, RBI Governor Shaktikanta Das reiterated that the central bank would continue to provide adequate liquidity and ensure easy financing conditions as the economy recovers from a contraction over the first and second quarters of 2020-21.

The MPC’s review follows the presentation of the Union Budget, which pegged the fiscal deficit for FY21 at 9.5% and at 6.8% for FY22.

CRR Cut To Be Reversed In Two Phases

While keeping rates unchanged, the RBI decided to reverse the CRR cut announced in March 2020 after the Covid-19 crisis hit.

In order to temper any adverse market reaction, RBI governor Das said the normalisation of CRR will leave space for the central bank to put other liquidity management tools to work.

Das said the stance of liquidity management continues to be accommodative and in consonance with the monetary policy stance. RBI stands committed to maintain adequate liquidity to ensure “congenial financial conditions”, he said, reiterating his stance from previous post-Covid policy statements.

He termed the perception of a reversal of the RBI’s liquidity support as a “market misconception’, saying the recently resumed variable rate reverse repo operations were always part of RBI’s liquidity framework.

Growth Outlook

Economic prospects have brightened further with the first vaccination drive in progress across the country. High-frequency data have held strong even after the festive season.

In addition, government spending has risen since October, supporting the economy. While the spending support in the coming financial year will be marginally lower than the current year, expenditure as a share of GDP will remain high.

Signs of a recovery have strengthened further since the last meeting, Das said.

Inflation Outlook

Retail inflation fell sharply in December, with some evidence that the decline sustained in January. With the drop, inflation fell back within the MPC’s target range of 4 (+/-2)% in December and is expected to remain range-bound in the coming months. Vegetable prices have eased with the arrival of the winter crop even as rising fuel costs may moderately impact inflation.

Core inflation remained stickier, showing a more marginal decline. Cost-push pressures continue to impinge on core inflation, as commodity prices rise.

The RBI governor added that the central bank continues to see inflation targeting as the appropriate framework for monetary policy. His comments come ahead of a scheduled review of the inflation target in March this year.

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