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The Reserve Bank of India (RBI) on Wednesday decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4%.

It said that the reverse repo rate under the LAF remains unchanged at 3.35% and the marginal standing facility (MSF) rate and the Bank Rate at 4.25%.

The RBI has also projected the real GDP growth for 2021-22 at 10.5% consisting of 26.2% in Q1, 8.3% in Q2, 5.4% in Q3 and 6.2% in Q4.

The Monetary Policy Committee (MPC), which is headed by RBI Governor Shaktikanta Das, has also decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.

The much anticipated boost to economic activity from the vaccination rollouts is being somewhat held back by new mutations of COVID-19, second and third waves of infections across countries and unequal access to vaccines more generally. World trade activity improved in Q4 2020 and January 2021, the MPC said.

However, there are concerns due to COVID-19-related fresh lockdowns and depressed demand in a few major economies, escalation in shipping charges and container shortages.

Inflation remains benign in major advanced economies (AEs), although highly accommodative monetary policies and large fiscal stimuli have added to concerns around market-based indicators of inflation expectations, unsettling bond markets globally.

In a few emerging market economies (EMEs), however, inflation is ruling above targets, primarily driven by firming global commodity prices. This has even prompted a few of them to raise policy rates.

Equity and currency markets have been turbulent with the increase in long-term bond yields and the steepening of yield curves. More recently, however, calm has returned and major equity markets have scaled new peaks in March, while currencies are trading mixed against a generally firming US dollar.

With the bond markets sell-offs, EME assets came under selling pressure and capital outflows imposed depreciating pressures on EME currencies in March.

Growth outlook

Rural demand remains buoyant and record agriculture production for 2020-21 bodes well for its resilience. Urban demand has been gaining strength on the back of normalisation of economic activity and should get a fillip with the ongoing vaccination drive, the MPC observed.

The fiscal stimulus from increased allocation for capital expenditure under the Union Budget 2021-22, expanded production-linked incentives (PLI) scheme and rising capacity utilisation (from 63.3% in Q2 to 66.6% in Q3:2020-21) should provide strong support to investment demand and exports.

Firms engaged in manufacturing, services and infrastructure polled by the Reserve Bank in March 2021 were optimistic about a pick-up in demand and expansion in business activity into 2021-22.

Consumer confidence, on the other hand, has dipped with the recent surge in COVID infections in some states imparting uncertainty to the outlook. Taking these factors into consideration, the projection of real GDP growth for 2021-22 is retained at 10.5% consisting of 26.2% in Q1, 8.3% in Q2, 5.4% in Q3 and 6.2% in Q4.

Reacting to the MPC announcements, Brickwork Ratings Chief Ratings Officer Rajee R said, “Given the renewed uncertainty in the economy, the MPC announcements provide reassurance of preserving adequate liquidity, protecting financial markets from external vulnerabilities and preventing the hardening of yields in the bond market.”

In line with BWR expectations, RBI has kept rates unchanged and retained its accommodative stance till growth is secured. Extending TLTRO for six months, introducing secondary market   G-sec acquisition Program 1.0 and the Rs 50,000 crore liquidity injection to the financial institutions, which includes Rs 10,000 crore to NHB, are positive developments. These are expected to sustain a balanced liquidity and keep the borrowing momentum buoyant in the markets, he added.



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