MUMBAI:

The Reserve Bank of India kept rates steady at record low levels as expected on Friday and said it would maintain support for the economy’s recovery from the pandemic by ensuring ample liquidity for markets to absorb a massive government borrowing programme.

“Going forward, the Indian economy is poised to move in only one direction and that is upwards. It is our strong conviction, backed by forecasts, that in 2021/22, we would undo the damage that COVID-19 has inflicted on the economy,” Reserve Bank of India Governor Shaktikanta Das said after announcing the rate decision.

The repo rate or RBI’s key lending rate was held at 4% while the reverse repo rate or its borrowing rate was left unchanged at 3.35%.

The repo rate has been cut by a total 115 basis points since March 2020 to cushion the shock from the coronavirus pandemic, following a 135 bps reduction since beginning of 2019.

Stressing that economic growth will only move upwards, Das pegged the GDP growth rate for the next financial year at 10.5 per cent, though a tad lower than the government's projection of 11 per cent.

The projection is in line with the estimates in the Union Budget 2021-22 presented in Parliament earlier this week.

Das said the six members of the monetary policy committee (MPC) were unanimous in their decision to keep rates on hold.

He said that the economy’s growth outlook had improved and that inflation was expected to remain within the RBI’s targeted range over the next few quarters.

“Given that inflation has returned within the tolerance band, the MPC judged that the need of the hour is to continue to support growth, assuage the impact of COVID-19 and return the economy to a higher growth trajectory,” Das said.

Inflation readings over the last two months have been better than the MPC had expected when it met in December, Das said while stressing that price stability remains the foundation on which the economy can reach its potential.

“Outlook on growth has improved significantly with positive growth impulses becoming more broad-based and the rollout of the vaccination program in the country auguring well for the end of the pandemic,” he added.

With the economy bouncing back from a low base after this pandemic stricken year, the MPC has projected GDP growth of 10.5% for the fiscal year starting April.

The central bank said it will restore the cash-reserve ratio (CRR) to its normal levels in two phases, 3.5 per cent (from 3 per cent now) effective March 27, and then at 4 per cent from May. This would mean banks will again have to set aside money with the central bank. The special relaxation of 100 basis points was made to tide over the Covid induced stress situation last year.

The Governor said the Union Budget 2021-22, has provided a strong impetus for revival of sectors such as health and well-being, infrastructure, innovation and research, among others.

This, he said will have a cascading multiplier effect going forward, particularly in improving the investment climate and reinvigorating domestic demand, income and employment.

Also, the vaccination drive is expected to provide an impetus for the restoration of contact intensive sectors and a leading edge to the Indian pharma industry in the global market, Das said, while highlighting various aspects of the economy.

"It is our strong conviction, backed by forecasts, that in 2021-22, we would undo the damage that COVID-19 has inflicted on the economy," he stressed.

After the Budget 2021-22 announcement on Monday, Economic Affairs Secretary Tarun Bajaj had said that real GDP growth would be 10-10.5 per cent in the next fiscal.

"Our revenue figure is under-stated not overstated. We have taken nominal GDP at 14.4 per cent and revenue growth at 16.7 per cent. So, the buoyancy is only 1.16. We are hopeful we will get more than this. We will definitely be within 6.8 per cent and could be lower also," Bajaj had said.

The monetary policy statement issued by the RBI said rural demand is likely to remain resilient on good prospects of agriculture. Urban demand and demand for contact-intensive services is expected to strengthen with the substantial fall in COVID-19 cases and the spread of vaccination.

Consumer confidence, it said is reviving and business expectations of manufacturing, services and infrastructure remain upbeat.

"The fiscal stimulus under AtmaNirbhar 2.0 and 3.0 schemes of government will likely accelerate public investment, although private investment remains sluggish amidst still low capacity utilisation," it added.

"… real GDP growth is projected at 10.5 per cent in 2021-22 in the range of 26.2 to 8.3 per cent in H1 and 6.0 per cent in Q3," Das said.

After a severe contraction in the June quarter showed India had been one of the major economies hit hardest by the pandemic, a pick up in manufacturing resulted in a much smaller contraction in the September quarter.

The MPC saw retail inflation running at 5.2% in the current quarter, and expected it to be between “5.2% to 5.0%” in the six months from April through September.

Das said the recent budget proposals and expenditure plans have raised hopes for a more robust recovery, and the bank stood ready to offer support and also ensure that the government’s 12.06 trillion Indian rupees ($165.42 billion) borrowing programme for the coming fiscal year was absorbed smoothly by the market.

“Importantly, the RBI talked about supporting growth,” said Kunal Kundu, India economist at Societe Generale.

“We would likely see the RBI coming to the aid of the government, even in the fiscal space either by opting for debt monetization or sharing a portion of their excess reserves.”

The blue chip Nifty 50 index was largely unchanged while the S&P BSE Sensex was up 0.59% after the central bank kept key rates steady.

The rupee strengthened marginally to 72.91 against the dollar, while the benchmark 10-year bond yield rose to 6.15% compared to its previous close of 6.10%.

“Importantly, the RBI talked about supporting growth,” said Kunal Kundu, India economist at Societe Generale.

“We would likely see the RBI coming to the aid of the government, even in the fiscal space either by opting for debt monetization or sharing a portion of their excess reserves.”

The blue chip Nifty 50 index was largely unchanged while the S&P BSE Sensex was up 0.59% after the central bank kept key rates steady.

“The MPC’s (monetary policy committee) decision is more or less in line with expectations. There was nothing in the announcement to help propel the markets higher,” said Neeraj Dhawan, director at Quantum Securities in New Delhi.

“Banking stocks are helping the indexes to hold on to gains and we are seeing some profit-taking as markets were at high valuations.”

Gains on the Nifty 50 were supported by State Bank of India, which surged as much as 15% to a record high. The lender on Thursday reported a 7% fall in its quarterly net profit, but beat analysts’ estimates.The Nifty PSU Bank index, which tracks state-run lenders jumped 6.5%, while the Nifty Banking index added nearly 3%.

Benchmark indexes, which closed at record highs on Thursday, are set to see a weekly gain of over 9% on optimism around the measures announced in the federal budget.

The health crisis is expected to trigger India’s biggest annual economic contraction in decades, and high inflation remains a cause of concern.