Mumbai: The Reserve Bank of India’s six-member monetary policy committee (MPC) has decided to keep interest rates unchanged at 4 per cent in its review meeting Thursday.
While holding the repo rate, the committee decided to maintain the accommodative stance.
All members of the panel voted for keeping the interest rate on hold.
“Economic activity started to revive from April and May… Inflation pressures were evident in all sub-groups,” RBI Governor Shaktikanta Das said while announcing the MPC’s decision.
What the RBI did earlier
In the last two policy meetings, in March and May, the central bank had reduced the repo rate twice by a total of 115 bps. One percentage point equals 100 bps.
The average consumer price index-based inflation was over 6 per cent for the two consecutive quarters, January-March and April-June. The MPC’s mandate is to maintain inflation at 4 per cent, within a band of +/- 2 per cent. The central bank is answerable to Parliament if it misses the inflation target for three consecutive quarters.
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The transmission of monetary policy rates to lending rates has been slow, shows RBI data. The weighted average lending rate on fresh rupee loans for scheduled commercial banks declined 47 bps — from 8.82 per cent to 8.35 per cent — between March and June, in response to a 115 bps reduction in the repo rate during the same period.
Outlook on inflation and growth
The MPC expects headline inflation to remain elevated in the second quarter of 2020-21, Das said. In its last two policy statements, the central bank has not predicted quarterly inflation numbers, which was a departure from the past practice.
“Supply chain disruptions on account of Covid-19 persist impacting both food and non-food items. Upside risks to food prices remain,” said Shaktikanta Das.
“Surges of fresh infections have forced fresh clampdowns by states,” he said. “Several high frequency indicators have levelled off.”
A more protracted spread of the pandemic is one of the key downside risks to growth, he said. Das said real GDP is expected to contract in the first half. For the full year too, economic growth is expected to be in the negative zone.
The RBI refrained from predicting growth in the last two policies as well, citing uncertainties due to the Covid-19 pandemic.
During the May policy review, RBI Governor Shaktikanta Das had said economic growth is estimated to be in the negative territory for 2020-21, with some pick-up in growth impulses from the second half of the fiscal.
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