Why RBI’s Monetary Policy Committee Kept Repo Rate Unchanged?

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) has announced its findings and decisions. The repo rate has been kept at 4% and the reverse repo rate at 3.35% seventh time in a row. The policy kept interest rates at historical lows. This is on expected lines. MPC started the bi-monthly deliberations on 4th August 2021. Only one member voted for the change in rates. So, the MPC maintained an accommodative stance with a 5-1 majority.

India is expecting a third wave of Covid cases. Few Indian states like Maharashtra, Kerala, and Rajasthan are still fighting the pandemic very hard. In some cities, lockdowns are going on. Like in Kolkata, Chief Minister Mamata Banerjee has announced that the metro city will be facing 'complete lockdown' throughout the month of August. The condition in Delhi is not also quite impressive. Migrated laborers are going back to work but not all of them could make it to work. They are either working on low wages or some of them lost their jobs completely.

In connection to this, the MSME sector is also not witnessing profits for a very long time. They are repeatedly demanding a financial boost for the sector. Consumptions (apart from necessity goods and FMCG) are going down consistently. The benchmark Consumer Price Index (CPI) inflation in India was above 6.0% during May-June. However, the CPI inflation estimate for overall FY22 has been raised to 5.7% from earlier 5.1%. CPI inflation break up has been stated at 5.9% in Q2, 5.3% in Q3, and 5.8% in Q4 of 2021-22 with risks broadly balanced.

Regarding that matter RBI Governor Shaktikanta Das has commented, "Recent inflationary pressures are evoking concerns but current assessment is that these are transitory." Inflation is not expected to be better in near future. Recently the inflation went highest in the last decade.

Big industries like the automobile and the real estate segment are sinking because of the lower buying capacity of people. Now in this situation, the RBI's decision to keep the repo rate the same is correct, though unlikely. This will help to infuse more liquidity into the economy. However, the rising inflation rate is a concern for the apex bank.

Walking a tight rope between inflation and growth

Consumer Price Inflation is already above the RBI's comfort level of 4%, while growth has been hit by the second covid wave and fears of a third one. So, the RBI has to walk a fine line between ensuring growth and taming inflation. The domestic economic ecosystem of India has been caught much with uncertainties. So, there is a strong need for continued economic policy support. The country is not expecting an additional economic boost any time soon. The previous boosts were mainly loan-based, rather than directing infusing. This is the reason the MPC is not actually trying to alter the repo rate now. The economists are taking a 'wait and watch' policy again in this quarter. RBI also kept the GDP growth target for FY22 at 9.5%. So, this unchanged repo rate might provide durability in the growth revival path.

"RBI continues to prioritize growth and maintain financial stability as far as necessary. Having said, it remains mindful of anchoring inflation expectations. While maintaining a balance between growth/inflation dynamics, RBI is likely to continue with orderly evolution of the yield curve through OMOs & GSAPs. Till durable growth recovery is seen, RBI may not resort to reversal of policy rates and would maintain sufficient liquidity in the system. However, RBI may gradually signal towards normalization of rates," says Nitin Shanbagh, Head - Investment Products, Motilal Oswal Private Wealth

While maintaining a balance between growth/inflation dynamics, RBI is likely to continue with orderly evolution of the yield curve through OMOs & GSAPs. Till durable growth recovery is seen, RBI may not resort to reversal of policy rates and would maintain sufficient liquidity in the system. However, RBI may gradually signal towards normalization of rates.

Additionally, a hike in the rate could leave a serious impact both on the equity and commodity market. The stock market in the later July already went through a sudden drop. The market is not ready to face another shock now. Supposedly, it requires liquidity infusion for the time being.