RBI goes for liquidity boost

Mumbai: The Reserve Bank on Friday made an expected move by retaining key lending rates, but cheered investors and home buyers by giving a liquidity boost and an optimistic outlook.

The central bank's Monetary Policy Committee, in its penultimate meet for 2020, decided to maintain the repo - or short-term lending - rate for commercial banks, at 4 per cent on the back of persistently high inflation, fanned in part due to supply side disruptions along with seasonal factors.

The reverse repo rate was also left unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the 'Bank Rate' at 4.2 per cent. Nevertheless, the MPC, with three new members, voted to maintain an accommodative stance, thus opening up possibilities for more future rate cuts.

It was broadly expected that the RBI's MPC might hold rates as recent data showed that retail inflation has been at an elevated level during June till August.

"The MPC evaluated domestic and global macroeconomic and financial conditions and voted unanimously to leave the policy repo rate unchanged at 4 per cent," RBI Governor Shaktikanta Das said on Friday. It also decided to continue with the accommodative stance of monetary policy as long as necessary - at least during 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, he added.

Das said that India's economy is entering into a decisive phase in the fight against the pandemic, citing that relative to pre-Covid levels, several high frequency indicators are pointing to the easing of contractions in various sectors of the economy and the emergence of impulses of growth.

"By all indications, the deep contractions of Q1:2020-21 are behind us; silver linings are visible in the flattening of the active caseload curve across the country," he said.

Barring the incidence of a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with its pre-Covid growth trajectory.

The Governor pointed out that some of "this optimism is being reflected in people's expectations".

In the September 2020 round of the RBI's survey, households expect inflation to decline modestly over the next three months, indicative of hope that supply chains are mending.

Significantly, the inflation expectations denote the likely timing of the next rate cut as monetary policy is in essence a tool to contain rising prices. Lately, retail inflation has been at an elevated level during July-August. The retail or consumer price index stood at 6.69 per cent in August. It had risen to 6.73 per cent in July. As per the data, retail inflation level has reached the upper limit of the medium-term CPI inflation target of four per cent. The target is set within a band of plus/minus two per cent.

Nonetheless, the RBI said that it will resort to on-tap long-term repo operations and open market bond purchases to ensure liquidity in the banking system. It has also eased capital requirements on home loans to spur lending to the real estate sector.