RBI keeps interest rates unchanged, announces measures to support economy

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June 05, 2021 5:00 AM

Pranjul Bhandari, India chief economist, HSBC, observed that while India’s CPI inflation is under the 6% upper limit of RBI’s tolerance band, it has been higher that the 4% target for the last 19 months. Bhandari believes inflationary pressures could rise gradually in 2HFY22.

Expectedly, the central bank retained its accommodative stance so as to keep bond yields in check and facilitate the government’s gigantic borrowing programme.Expectedly, the central bank retained its accommodative stance so as to keep bond yields in check and facilitate the government’s gigantic borrowing programme.

The Reserve Bank of India (RBI) on Friday reiterated its commitment to growth, throwing in more measures to stimulate lending to smaller companies and easing rules so more of them would be eligible for loan recasts. It opened cheaper credit lines for SIDBI and banks – for an amount of Rs 15,000 crore — to incentivise them to lend to contact-intensive sectors.

Expectedly, the central bank retained its accommodative stance so as to keep bond yields in check and facilitate the government’s gigantic borrowing programme. “There is no thinking right now on normalising the accommodative policy, it is too early, too premature to talk about it,” RBI governor Shaktikanta Das observed indicating the RBI isn’t unduly worried about inflationary pressures and would continue to bat for growth. Das also expressed anxiety rural demand might be hurt by rising infections, notwithstanding the promise of a good monsoon, at a time when urban demand had been dented.

Indeed, the GDP growth outlook for FY22 was pared to 9.5% while inflation forecasts have been tweaked up very slightly to 5.1%. “The MPC has taken the conscious decision to focus on growth,” Das asserted. The governor expressed concerns on worsening cost conditions but hoped weak demand would temper the pass-through effects. Deputy governor Michael Patra observed that for now inflationary pressures are being primarily stoked by supply-side conditions rather than any meaningful demand-pull which is why the MPC has seen it fit to look through them.

Pranjul Bhandari, India chief economist, HSBC, observed that while India’s CPI inflation is under the 6% upper limit of RBI’s tolerance band, it has been higher that the 4% target for the last 19 months. Bhandari believes inflationary pressures could rise gradually in 2HFY22.

Abheek Barua, chief economist, HDFC Bank, noted that a more equitable distribution of credit is likely to be contingent on the whether the assessment of risks is in line with the markup over reverse repo provided by the RBI to banks. “Therefore, some form of credit guarantees is perhaps required for de-risking the system,” Barua observed.

The next round of GSAP 1.0 comes with a carve out for state loans, a move that upset the bond markets somewhat, though GSAP2.0 comes with a higher amount of Rs 1.2 lakh crore. Das stressed the need for equitable distribution of liquidity opening up an additional line of credit to SIDBI. Banks, too, can access a new credit line for Rs 15,000 crore for fresh loans to contact-intensive sectors. This is on offer till March 31, 2022 – for tenors of up to three years at the repo rate.

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