The Reserve Bank of India (RBI) on Friday retained its key short-term lending rates to subdue the persistently high inflation rate.
The Monetary Policy Committee (MPC) of the central bank, however, maintained the growth-oriented accommodative stance, thus opening up possibilities for more future rate cuts.
The MPC voted to maintain the repo rate -- or short-term lending rate for commercial banks, at 4 per cent.
Likewise, the reverse repo rate was kept unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.
It was widely expected that the Reserve Bank's MPC will hold rates as recent data showed that retail inflation has been at an elevated level during June.
As per recent data, the Consumer Price Index (CPI), which gauges the retail price inflation, spiked in October to 7.61 per cent from 7.27 per cent in September.
Though not-comparable, India had recorded a retail price inflation of over 3 per cent in the corresponding period of previous year.
The RBI maintains a medium-term CPI inflation target of 4 per cent. The target is set within a band of +/- 2 per cent.
In an online address detailing the MPC's decision, RBI Governor Shaktikanta Das said: "At the end of its deliberations, the MPC voted unanimously to leave the policy repo rate unchanged at 4 per cent."
"It also decided to continue with the accommodative stance of monetary policy as long as necessary - at least through the current financial year and into the next year - to revive growth on a durable basis and mitigate the impact of Covid-19, while ensuring that inflation remains within the target going forward."
According to Das, the MPC was of the view that inflation is likely to remain elevated, with some relief in the winter months from prices of perishables and bumper kharif arrivals.
"This constrains monetary policy at the current juncture from using the space available to act in support of growth. At the same time, the signs of recovery are far from being broad-based and are dependent on sustained policy support."
"A small window is available for proactive supply management strategies to break the inflation spiral being fuelled by supply chain disruptions, excessive margins and indirect taxes. Further efforts are necessary to mitigate supply-side driven inflation pressures. The MPC will monitor closely all threats to price stability to anchor broader macroeconomic and financial stability."
Besides, Das said that India's economy has witnessed a faster than anticipated recovery and its expected Real GDP growth rate will be at (-) 7.5 per cent in FY21.
He cited that several high frequency indicators have pointed to growth in both rural and urban areas.
"Consumers remain optimistic about the outlook and business sentiment of manufacturing firms is gradually improving. Fiscal stimulus is increasingly moving beyond being supportive of consumption and liquidity to supporting growth-generating investment," he said.
"On the other hand, private investment is still slack and capacity utilisation has not fully recovered. While exports are on an uneven recovery, the prospects have brightened with the progress on the vaccines."
"Taking these factors into consideration, real GDP growth is projected at (-) 7.5 per cent in 2020-21, (+) 0.1 per cent in Q3:2020- 21 and (+) 0.7 per cent in Q4:2020-21; and 21.9 per cent to 6.5 per cent in H1:2021- 22, with risks broadly balanced."
Furthermore, Das elaborated that RBI will take additional measures to enhance liquidity support to targeted sectors having linkages to other sectors, deepen financial markets and conserve capital among banks, NBFCs through regulatory initiatives amongst other steps
Later on during a press interaction, Das, while answering to a question, replied that RBI has not 'junked' inflation targeting via monetary policy mechanism.
He also admitted that past inflation expectations have not materialised.
Citing extraordinarily situation, he said: "Our expectations on inflation, which we had over the last two months obviously, has not materialised. And we have to keep in mind that we are dealing with an extraordinary situation. A once in a hundred years kind of event, and the kind of impact it has produced on the economy as well as on human lives, not just in India but across countries. It's huge. So, we have to respond to this particular situation."
Corroborating the assessment, RBI's Deputy Governor Michael D. Patra said: "You will see the trajectory of inflation completely changing. But what we have given you is the baseline with things, standing as they are today."
"But, if you read into the guidance that the Governor is giving. He sees this window as a chance for supply side management which is the prime instrument to use at this juncture, to produce a different trajectory of inflation."
On the RBI's internal working group's recommendations on banking guidelines, he said that the final decision on the same has not been taken.
Reflecting back on the volatile calender year 2020, the Governor explained that liquidity inducing measures have attained their desired objectives.
In addition, the Reserve Bank has decided to bring the 26 stressed sectors identified by the K.V. Kamath Committee under the ambit of on-tap targeted long-term repo operation (TLTRO).
The measure has been adopted under its regulatory and development policies which are independent of the MPC.
So far five sectors were eligible for the scheme as announced on October 21.
The policy review, the last one for the calendar year 2020, garnered positive response from the markets and India Inc.
Reacting to the improved GDP growth forecast, the S&P BSE Sensex crossed the 45,000 mark for the first time ever.
The S&P BSE Sensex crossed the 45,000 mark for the first time ever. It touched a new intraday record high of 45,148.28 points.
The NSE Nifty50 touched a fresh record high of 13,280.05 points.
"A pause from the Monetary Policy Committee in its December 2020 policy review was the foregone conclusion, given the further hardening of inflation, and the shallower than expected contraction in GDP in Q2 FY2021," said Aditi Nayar, Principal Economist, ICRA.
"Regardless of the MPC's conclusion that India has already exited from the recession that gripped it in H1 FY2021, a continued output gap resulted in the expected continuation of the accommodative stance."
Sunil Kumar Sinha, Principal Economist, India Ratings and Research, said: "We are in for a long pause on policy rates even though growth is not broad-based yet and need significant policy support. RBI expects Indian economy to have a positive growth in 3Q and 4Q of FY21 though Ind-Ra believes it will be an uphill task for the economy to witness positive GDP growth in 2HFY21 despite surprise 2QFY21 GDP growth."
"Though MPC did not tinker with the policy rate in its meeting, it continued its effort on the supervisory and regulatory front and announced more measures to ensure financial stability and adequate liquidity in the system."
Emkay Global's Lead Economist Madhavi Arora said: "We reckon the current liquidity deluge is not necessarily feeding into current inflation dynamics and, hence, surplus liquidity is unlikely to immediately interfere with core monetary policy objectives."
"That said, we think the RBI may take actions to smoothen the distribution of liquidity across the yield curve amid inexplicable steepness."
Brickwork Ratings' Chief Knowledge Officer Rajat Bahl said: "Maintaining an accommodative stance under this elevated inflation environment is a risk, but augurs well for the bond market that had started showing signs of tightening, especially for NBFCs."
"Risk-based supervision for NBFCs and the expectation of a stronger risk and governance framework from NBFCs is a welcome move that will strengthen the sector and provide confidence to investors."
Suman Chowdhury, Chief Analytical Officer, Acuite Ratings & Research, said: "One of the steps to encourage lending from the banking sector has been to permit the banks to use the TLTRO route to fund the additional exposures to the stressed corporate and the SME borrowers under the ECGLS scheme."
"RBI has also made some important announcements to strengthen the framework for financial stability. NBFCs and UCBs are expected to witness a tighter supervisory environment with guidelines on risk based internal audit to be put in place."