The Monetary Policy Committee (MPC) of the Reserve Bank of India unanimously decided to keep the repo rate unchanged at 4%. While Governor Shaktikanta Das has said that the RBI’s accommodative stance continues, the maintenance of rates runs counter to general market expectations that the central bank will cut official rates to allow banks to lend more funds to customers.
- Along with its decision to maintain rates, the central bank also announced a major restructuring program to lend to stressed MSMEs (loan rescheduling), which banks and NBFCs have strongly championed in the face of growing concerns on the front line.
- A Bad debts panel will be established to work out the details of this scheme.
- As the Indian economy is still grappling with new localized lockdowns to control the spread of Covid-19 and lingering concerns about demand, especially in sectors such as residential real estate and consumer durables, the RBI was increasingly expected to cut back further its policy by an additional 25 basis points (one basis point equals one hundredth of a percentage point) to stimulate growth.
There could be two main reasons why the MPC did not cut rates
First, retail inflation, measured by the consumer price index, rose in June from 5.84% to 6.09% in March, exceeding the central bank’s medium-term goal. 2 to 6%. This appears to have been a major red flag, prompting the MPC’s unanimous decision to refrain from cutting official rates.
- Das specifically expressed concern about national food inflation, which remains high, although he mentioned that the outlook for the agricultural sector has improved with the good monsoon and increased acreage for planting kharif.
- Second, in May, the MPC reduced the repo rate by 40 basis points to 4%, while maintaining its accommodative policy.
- In fact, in the past seven months, the MPC has already lowered the repo rate by 115 basis points amid the COVID-19 outbreak and the resulting economic consequences, even as the transmission by banks to clients has not yet is fully operational.
- In the big picture, Das said global economic activity remains fragile, although financial markets have been vibrant.
- Real GDP growth will remain negative, he said, even as “any positive news about the COVID-19 containment efforts would change that scenario.”
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