RBI Monetary Policy: Repo Rate Unchanged at 4%

The RBI Monetary Policy Committee (MPC) on December 8 retained the key lending rate, repo, at 4 percent, and maintained its stance as “accommodative”.

Repo is the rate at which the Reserve Bank of India lends short-term funds to banks. This is the ninth consecutive policy meeting where the rate setting panel has maintained the key lending rate.

The MPC has also maintained the reverse repo rate at 3.35 percent and the MSF rate at 4.25 percent.

The announcement came in the context of fresh threats from the Omicron variant. So far, India has reported over two dozen Omicron cases. This has forced several states to impose fresh travel restrictions. There is a fear that the Omicron surge will lead to a third wave of Covid-19 in the country.

The MPC said the policy stance will remain “accommodative” until there is sustainable recovery in the economy. An accommodative stance means the MPC is willing to either lower rates or keep them unchanged.

Five out of six MPC members voted to keep the stance accommodative, Governor Shaktikanta Das said.

“The prospects of economic activity are steadily improving,” he said, but added that continued monetary policy was needed for a sustained recovery in the economy.

India’s GDP, in the second quarter of FY22, grew at 8.4 percent, compared with a decline of 7.4 percent in the corresponding period in the last year. But, this is largely due to base effect.

The RBI has retained its GDP growth projection at 9.5 percent for FY22, but revised Q3FY22 growth estimate to 6.6 percent from 6.8 percent earlier.

Das said that the emergence of Omicron has given rise to fears of further restrictions on travel and economic activity, which has led to “considerable uncertainty on growth dynamics” for the coming months.

The governor said that the reduction in VAT of fuel will have direct impact on inflation, but price pressures may persist in the near term.

However, the RBI expects headline inflation to peak in Q4FY22, after which it is likely to soften.

Inflation has eased of late, but is still away from MPC’s ideal rate of 4 percent. India’s retail inflation rate, which is measured by the Consumer Price Index (CPI), rose to 4.48 percent in October. The CPI-based inflation in September 2021 was at 4.35 percent and 7.61 percent in October 2020.

The RBI sees CPI inflation at 5.3 percent for FY22–5.1 percent in Q3 and 5.7 percent in Q4–with risks broadly balanced.

Price stabiity remains the cardinal principal of monetary policy as it fosters growth and stability, the governor said. “The RBI’s motto is to ensure a soft landing that is well timed,” he added.

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