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Citing inflation concern, RBI holds key rate; says recovery needs support

The Reserve Bank of India (RBI) on Friday left key policy rates unchanged for the third time in a row in the wake of persistently high retail inflation, even as it pointed to the economy, which contracted in the last two quarters, showing signs of an early recovery.

The six-member Monetary Policy Committee (MPC) decided to maintain status quo on the policy rate and to continue with the accommodative stance “as long as necessary, at least during the current financial year and into the next financial year” to revive growth on a durable basis, while ensuring that inflation remains within the target range.

In its bi-monthly monetary policy, the central bank also offered more funds to 26 stressed sectors in the Covid-hit economy to maintain the tempo of the recovery. On the RBI Internal Working Group’s recommendation to allow industrial houses to enter the banking sector, RBI Governor Shaktikanta Das said: “It is a report by an internal working group. It should not be seen as the RBI’s point of view or decision.”

RBI monetary policy Explained: Why have rates been kept unchanged yet again?

The policy panel kept the main policy rate, repo rate, at 4 per cent and reverse repo rate at 3.35 per cent. With consumer price inflation at a six-year high of 7.6 per cent in October, the RBI said it expects inflation in the October-December quarter to be 6.8 per cent, which is well above its medium target level of 4 per cent within a band of plus/minus 2 per cent.

The policy panel indicated that the economy is showing signs of recovery. The RBI now believes that GDP contraction for the full fiscal year will be lower at 7.5 per cent against the 9.5 per cent projected earlier. GDP contracted by 23.9 per cent in the June quarter and 7.3 per cent in the September quarter. But with the country gradually opening up after the lockdown, real GDP is expected to expand by 0.1 per cent in the December quarter and 0.7 per cent in the March quarter, the RBI said.

“The MPC is of the view that inflation is likely to remain elevated, barring transient relief in the winter months from prices of perishables. This constrains monetary policy at the current juncture from using the space available to act in support of growth,” Das said.

At the same time, the signs of recovery are far from being broad-based and are dependent on sustained policy support, he said — and reiterated that while inflation remains a policy priority, the pandemic warrants special attention to growth.

Das said the preservation of financial stability and interest of depositors remained uppermost on the RBI’s agenda. “We could swiftly resolve the situation at two scheduled commercial banks (Yes Bank and Lakshmi Vilas Bank). We remain strongly committed to preserve the stability of the financial sector and will do whatever is necessary on this front,” he said.