RBI policy update: Repo rate, inflation, growth, liquidity and more

RBI policy update: Repo rate, inflation, growth, liquidity and more

Last updated: 07 Apr, 2021 | 07:05 am

RBI policy update: Repo rate, inflation, growth, liquidity and more

Repo rate unchanged, RBI maintains accommodative stance

  • The  RBI's Monetary Policy Committee (MPC) has kept the repo rate unchanged at 4% in its bi-monthly policy meeting held today. The reverse repo rate too stands unchanged at 3.35%. 
  • Repo rate is the rate at which the RBI lends to commercial banks, and reverse repo is the rate at which it borrows from them. 
  • The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target going forward. 
  • The repo rate has been cut by a total 115 basis points since March 2020 to cushion the shock from the pandemic.

Commentary on Inflation and growth

  • RBI said that these decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%; while at the same supporting growth. 
  • CPI inflation has now remained within RBI’s upper tolerance band of 4-6% in the last three months. Retail inflation rose to 5.03% in Feb-21, compared with 4.06% in Jan-21. The rise in retail inflation was mainly due to a rise in food prices.
  • Going forward, RBI expects CPI inflation to be 5% in Q4FY21; 5.2% in Q1FY22, 5.2% in Q2, 4.4% in Q3 and 5.1% in Q4. All of this is within its tolerance band.
  • RBI has projected a GDP growth rate of 10.5% for FY22. This projection remains unchanged from the previous assessment. RBI Governor Shaktikanta Das warned about the downside risks, particularly from the second wave of Covid-19 infections.
  • Going forward, the trajectory of inflation will be decided by food inflation and petroleum prices. Bumper production in 2020-21 should sustain softening of cereal prices, noted RBI. Reduction of excise duties and cesses and state level taxes could provide some relief to consumers, in the current backdrop of easing international crude prices.

Additional steps by RBI

  • To support the debt markets, the RBI announced a new secondary market bond purchase programme worth Rs 1 lakh crore in Q1FY22, with the aim of flattening the yield curve. 
  • RBI has extended the deadline for TLTRO on-tap liquidity scheme to September 30, 2021 from March 31, 2021 earlier. Read about RBI’s operation twist here. RBI has also announced Rs 50,000 crore additional liquidity facility to NABARD, NHB and SIDBI for fresh lending during FY22.
  • Boost to payment banks: RBI has allowed payment banks to accept deposits worth Rs Rs 2 lakh with immediate effect, from Rs 1 lakh earlier. 
  •  RTGS and NEFT membership to be allowed for non-bank payment institutions including Fintechs.

INDmoney Analysis

  • The RBI has noted that the hope generated by vaccination drives in several countries at the start of the year 2021 has been somewhat offset by rising infections and new mutant strains worldwide. This could hurt the economic recovery witnessed over the last few months.
  • The various measures announced by the RBI has led to easing of the 10-year GSec yields, indicating that the bond markets have cheered the announcements of additional liquidity and the bond repurchase programme. 
  • The decision to maintain the repo and reverse repo rate by the RBI was in line with street expectations. CPI inflation within the RBI band for the last three months has lent comfort. However, there are risks of inflation rising upwards due to demand recovery, as economic growth momentum picks up. 
  • Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the volatility.
  • Stick to AAA-rated low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future but in the medium term (2-3 years) the rate cycle is expected to bottom out and move up.