RBI keeps interest rates at record low, signals tapering of stimulus measures

NEW DELHI (Commodities control) The Reserve Bank of India kept interest rates unchanged at a record low on Friday but signalled the start of tapering pandemic-era stimulus measures on economic recovery taking roots.

The six-member Monetary Policy Committee (MPC) kept the key lending rate or the repo rate unchanged at 4 per cent while the reverse repo rate or the borrowing rate was maintained at 3.35 per cent. It voted 5-1 to retain the accommodative stance, RBI Governor Shaktikanta Das said in an online broadcast. He indicated the central bank's willingness to make "gradual" adjustments to the excess liquidity in the monetary system which currently stands at over Rs 9 lakh crore.

Importantly, the GSAP programme to purchase government securities from the market has been stopped for now to ensure that there is no further infusion of liquidity, he said and stressed that the step is not a reversal of its accommodative policy stance. RBI will be ready to resume bond purchases if needed, he added. RBI had bought Rs 2.2 lakh crore worth bonds through Government Securities Acquisition Programme or GSAP in the previous two quarters.

While it maintained GDP growth projection at 9.5 per cent for the current fiscal ending March 2022, the central bank cut the forecast for the headline inflation to 5.3 per cent from 5.7 per cent based on the current moderation in the liquidity trajectory. "Aggregate demand is improving but slack still remains," Das said. "Output is still below pre-pandemic level and the recovery remains uneven and dependent upon continued policy support."

The existing 14-day VRRR auction will be stepped up with the auction amount set to increase by Rs 1-2 lakh crore over the next 2 months, reaching up to Rs 6 lakh crore by December. Further, RBI may consider the introduction of a 28-day VRRR, if necessary, to further calibrate the liquidity levels. The plan is to reduce the surplus system liquidity from the current high levels to around Rs 2-3 lakh crore by the end of the current quarter. "Since the onset of the pandemic, the Reserve Bank has maintained ample surplus liquidity to support a speedy and durable economic recovery," he said.

The level of surplus liquidity in the banking system increased further during September 2021, with absorption through fixed-rate reverse repo, Variable Rate Reverse Repo (VRRR) of 14 days and fine-tuning operations under the Liquidity Adjustment Facility (LAF) averaging Rs 9 lakh crore per day as against Rs 7 lakh crore during June to August 2021, he said.

As the economy shows signs of emerging from the COVID impact, a near-consensus view emerging among market participants and policy makers is that the liquidity conditions emanating from the exceptional measures instituted during the crisis would need to evolve in sync with the macroeconomic developments to preserve financial stability, Das said. "This process has to be gradual, calibrated and non-disruptive while remaining supportive of the economic recovery," he noted.

RBI has slashed the repo rate by a total of 115 basis points (bps) since March 2020 to soften the blow from the coronavirus pandemic and tough containment measures. This follows rate cuts to the tune of 135 bps since the beginning of 2019. "With the worst of the second wave behind us and substantial pick-up in COVID vaccination giving greater confidence to open up and normalise economic activity, the recovery of the Indian economy is gaining traction," Das said.

"Economic recovery has gained momentum, supported by ebbing of infections, the robust pace of vaccination, expected record Kharif foodgrains production, government's focus on capital expenditure, benign monetary and financial conditions, and buoyant external demand," he added.

Other measures announced on Friday include extending the three-year Special Long Term Repo Operation (SLTRO) of Rs 10,000 crore for Small Finance Banks (SFBs) till year-end, the introduction of a framework for retail digital payments in offline mode, raising the limit of domestic fund transfer to Rs 5 lakh per transaction from Rs 2 lakh currently, geo-tagging of payment system touch points and appointing internal ombudsman for NBFCs.

(By Commoditiescontrol Bureau: +91-22-40015505)