RBI maintains repo rate at 4%, real GDP to remain in contraction zone

INDIA-CENBANK-GOVERNOR
RBI Governor Shaktikanta Das

New Delhi:  The Reserve Bank of India (RBI) on Thursday opted for a status quo and left interest rates unchanged, but maintained an accommodative stance, implying more rate cuts in future if the need arises to support the economy hit by the COVID-19 crisis.

The benchmark repurchase (repo) rate has been left unchanged at 4 per cent, Governor Shaktikanta Das said while announcing the decisions taken by the central bank's Monetary Policy Committee (MPC).

Consequently, the reverse repo rate will also continue to earn 3.35 per cent for banks for their parked deposits kept with the RBI.

He said the MPC voted for keeping interest rate unchanged and continued with its accommodative stance to support growth.

RBI had last revised its policy rate on May 22, in an off-policy cycle to perk up demand by cutting interest rate to historic low.

The six-member Monetary Policy Committee (MPC), headed by the RBI Governor, announced the decision after the 24th meeting of the MPC.

"The economy's real GDP is likely to continue in the contraction zone," the Reserve Bank of India (RBI) Governor said.

Economic activity had started to recover, but surge in infection has forced imposition of lockdowns. Global economic activity has remained fragile and the surge in COVID-19 cases has subdued early signs of revival. Supply chain disruptions persist and inflation pressures evident across segments, he said.

Monetary Policy Committee expects inflation to remain elevated in Q2, ease in second half of fiscal, the RBI Governor said.

"The focus is on restructuring. Finance ministry is actively engaged with RBI on this. In principle, the idea that there may be a restructuring required, is well taken," Finance Minister Nirmala Sitharaman had said last week.

The fast-changing macroeconomic environment and the deteriorating growth outlook necessitated off-cycle meetings of the MPC -- first in March and then again in May 2020.

The MPC has cumulatively cut the repo rate by 115 basis points over these two meetings, resulting in total policy rate reduction of 250 basis points since February 2019, with an aim to boost economic growth.

The central bank has been taking steps proactively to limit the damage to the economy caused by the pandemic and subsequent lockdowns.

As per a research report by SBI, banks have cut rates on fresh loans by 72 basis points, the fastest transmission ever recorded.

SBI has cut by an equivalent 115 basis points on its repo-linked retail loan portfolio.

The government has tasked RBI to keep inflation at 4 per cent (+, - 2 per cent). The central bank mainly factors in the Consumer Price Index (CPI) while formulating the monetary policy.

Higher prices of food items, especially meat, cereals and pulses, pushed the CPI-based retail inflation to 6.09 per cent in June. The inflation rate for July will be announced on August 12.

The monetary policy was in an accommodative mode even before the outbreak of COVID-19, with a cumulative repo rate cut of 135 basis points between February 2019 and the onset of the pandemic.

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