The Reserve Bank of India (RBI) has kept the key policy rate (repo rate) unchanged at 4% for the seventh consecutive time as growth continued to be the overarching concern despite a rising inflation.

The monetary policy committee (MPC) also decided unanimously to leave the reverse repo rate, or the rate at which the RBI absorbs excess liquidity from banks, unchanged at 3.35%. Repo rate is the rate at which the central bank lends short-term funds to banks.

To keep interest rates at a sweet spot, the central bank continued to keep money cheap hoping to spur investments. But the Covid-19 pandemic stayed a worry. While the RBI retained its projection for growth for FY22 at 9.5%, it downgraded the growth projections for the subsequent quarters.

The GDP growth in the second quarter is now down to 7.3% from 7.9% projected earlier. The central bank revised downwards the growth estimate in the third quarter to 6.3% from 7.2% projected earlier. The fourth quarter projection now stands at 6.1%, from the previous projection of 6.6%.

“The Reserve Bank remains in ‘whatever it takes’ mode, with a readiness to deploy all its policy levers - monetary, prudential or regulatory,” RBI Governor Shaktikanta Das said on Friday, adding that the “economy is faring better than it was in June”. But the shadow of the pandemic continues to be a “dominant dampening factor”.

Inflation

RBI has projected consumer price index (CPI) inflation at 5.7% for FY22, sharply up from its earlier forecast of 5.1%, with inflation touching 5.9% in the second quarter, 5.3% in the third quarter and 5.8% in the fourth quarter of 2021-22. It projected CPI inflation for the first quarter of FY23 at 5.1%. India’s retail-index inflation stayed above RBI’s 6% upper band target for two straight months.

“Consumer price inflation surprised on the upside in May, reflecting a combination of adverse supply shocks, elevated logistics costs, high global commodity prices and domestic fuel taxes. In June, headline inflation remained above the upper tolerance level, but price momentum moderated. Also, core inflation softened from its peak in May. International crude oil prices remain volatile; any moderation in prices as a consequence of the OPEC plus agreement could contribute towards alleviating inflation pressures,” Das said.

To contain inflation, RBI announced measures to tighten liquidity through the Variable Reverse Repo Rate (VRRR) route. It also expects banks to deposit Rs 4 lakh crore (overnight money) in the regular fixed rate reverse repo window.

“While the policy stance continues to be accommodative to continuously support growth, a strategy of careful recalibration of liquidity management is clearly indicated with the roll out of VRRR,” said State Bank of India chairman Dinesh Khar.

“The rising input prices across manufacturing and services sectors is expected to be offset by weak demand and efforts towards cost cutting. We believe inflation management could pose a serious challenge to RBI when the elevated fuel price pass through starts to occur. Though a calibrated reduction of the indirect tax component of pump prices by the Centre and states can help to substantially lessen cost pressures,” Soumya Kanti Ghosh , Group economic adviser said in SBI’s research report, Ecowrap.

Liquidity measures

To revive certain sectors, RBI had announced in October 2020 to conduct Rs 1 lakh crore worth of 3-year on-tap TLTROs (targeted long-term repo operations) till March 2021 at a floating rate linked to the repo rate. Under this scheme, banks can draw liquidity as per their need to on-lend to needy segments.

In April 2021, the scheme was extended by a period of six months, i.e., till September 2021.

Given the nascent and fragile economic recovery, the RBI has now decided to extend the scheme further by a period of three months, till December 2021.

The scope of the on-tap TLTRO scheme, initially announced on October 9, 2020 for five sectors, has been further extended to stressed sectors identified by the Kamath Committee in December 2020 and bank lending to NBFCs in February 2021.

The RBI has also extended the relaxation given to banks on marginal standing facility (MSF) till December 2021. On 27 March 2020, RBI allowed banks to avail of funds under the MSF. With the extension, banks will have increased access to funds to the extent of Rs1.62 lakh crore, Das said.

Due to the second wave of coronavirus on businesses, the RBI extended the deadline for companies to meet certain financial parameters required to avail the resolution plans announced in August last year. These ratios were required to be met by 31 March 2022.

"Recognizing the adverse impact of the second wave of Covid-19 and the resultant difficulties on revival of businesses and in meeting the operational parameters, it has been decided to defer the target date for meeting the specified thresholds in respect of the above four parameters to 1 October 2022," the RBI said.

Das believes the economic recovery post-Covid is on the way. “Although investment demand is still anaemic, improving capacity utilisation, rising steel consumption, higher imports of capital goods, congenial monetary and financial conditions and the economic packages announced by the central government are expected to kick-start a long-awaited revival,” Das said.

Firms polled in the Reserve Bank’s surveys expect expansion in production volumes and new orders in Q2:2021-22, which would sustain through Q4:2021-22, boding well for investment. Innovation and working models adopted during the pandemic by businesses will continue to reap efficiency and productivity gains even after the pandemic recedes. This, the central bank, hopes would help trigger a virtuous cycle of investment, employment and growth.

RBI ban on HDFC Bank and Mastercard

A keenness to ensure compliance to regulatory guidelines has led the RBI to initiate strong actions against entities like HDFC Bank, Mastercard and American Express, Das said.

The RBI has banned HDFC Bank from selling new credit cards after instances of service outages while Mastercard and American Express have been asked to not sell any new cards for not complying with local data storage norms.

"All our actions are an outcome of our keenness and our responsibility to ensure that regulatory guidelines are complied," Das told reporters.

A regulated entity, be it a card company, bank or non-bank lender, is expected to comply with regulatory guidelines, the RBI Governor elaborated.

The actions in many of the cases have been unprecedented and have been continuing for months, he added.