Policy Watch: RBI holds rates, says recovery needs support

The central bank is of the view that the economy, while regaining momentum, needs support so that the recovery is sustainable and broad-based.

Given demand for credit remains subdued, loan rates on products like home loans could stay low in a competitive environment.
Given demand for credit remains subdued, loan rates on products like home loans could stay low in a competitive environment.

Reserve Bank of India (RBI) on Wednesday continued to bat for growth leaving key policy rates unchanged and retaining its accommodative stance. The central bank is of the view that the economy, while regaining momentum, needs support so that the recovery is sustainable and broad-based.

Both the stock and bond markets cheered the RBI’s dovish tone; the yield on the benchmark fell four basis points to close at 6.347%. Given demand for credit remains subdued, loan rates on products like home loans could stay low in a competitive environment.

The RBI observed aggregate demand is weak, as reflected in the Q2FY22 GDP data. Private investment needed to boost aggregate demand, governor Shaktikanta Das observed, was still lagging while the Omicron variant of the Covid-19 virus had brought in more uncertainty. The output gap, deputy governor Michael Patra cautioned, may not close for a few years. Despite the Q2FY22 GDP growth overshooting the RBI estimate, the central bank left its forecast for FY22 unchanged at 9.5%.

While not unmindful of the price pressures building up on account of various factors, and cognizant of the fact that core inflation is sticky, the central bank believes that inflation will peak at 5.7% in Q4FY22 and ease thereafter to 5% in Q1 and Q2FY23. “In the current situation it is important to keep inflation aligned with the target while focussing on a robust growth recovery,” Das observed.

HSBC India chief economist Pranjul Bhandari is of the view growth has become stronger and that core inflation will remain elevated. “We think the policy corridor will be narrowed over February and April, andrepo rate hikes will follow in mid-2022,” Bhandari said.

Abheek Barua, chief economist, HDFC Bank, expects monetary policy normalisation process to get a leg up in February and sees the possibility of a reverse repo hike if the omicron virus is managed. “We expect a change in stance in April from accommodative to neutral and a repo rate hike by June or August policy 2022,” Barua said.

Meanwhile, the central bank will continue with its liquidity draining measures; it proposes to increase the amounts for the 14-day VRRR (variable reverse repo rate) auctions to `6.5 lakh crore on December 17 and further to Rs 7.5 lakh crore on December 31.

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