India Monetary Policy August 2021

India: Reserve Bank of India keeps rates unchanged in August

At its monetary policy meeting ending on 6 August, the Reserve Bank of India (RBI) kept its policy rates unchanged, which met market expectations. The RBI left the reverse repurchase rate, the repurchase rate and the marginal standing facility rate at 3.35%, 4.00% and 4.25%, respectively.

The Bank decided additional easing was not warranted, as domestic Covid-19 cases have remained well below their early May peak, auguring a subsequent easing of lockdown measures. Moreover, an expected normal monsoon season bodes well for the rural economy. In contrast, it was premature to begin tightening policy, as the ongoing pandemic continues to cast uncertainty over the outlook. Meanwhile, the Bank raised its inflation forecasts from 5.1% to 5.7% for this fiscal year, citing temporary supply shocks driving up price pressures, but it expects ongoing economic slack to temper inflationary pressures over the medium term.

In its communiqué, the RBI reiterated that it would “continue with the accommodative stance as long as necessary” to support growth, while ensuring inflation remains within the 2.0%–6.0% target range. The majority of panelists see rates remaining unchanged this year, although a few see hikes on the cards.

Commenting on the outlook for monetary policy, Barnabas Gan, an economist at United Overseas Bank, noted:

“Given the improving economic prognosis and ebbing Covid-19 infections in India, it is evident that the RBI will likely floor its policy rate at 4.00% for the rest of this year. While we are heartened over the improving export and manufacturing environment, Covid-19 remains to be a key uncertainty for India, and growth prospects will depend largely on how Covid-19 evolves.”

Commenting on the RBI’s bond-buying program, Robert Carnell, head of research at ING, noted:

“We think a key question for today’s meeting is whether the RBI should restrain its liquidity-boosting policies. Such policies are partly stoking inflation rather than supporting economic recovery as evident from the steadily slowing bank lending growth towards low single-digits. […] We consider the RBI among the first few Asian central banks to withdraw policy accommodation by early next year on inflation grounds. We have brought forward our forecast for the first 25 basis-point rate hike from Q3 2022 to Q1 2022.”

The next meeting is scheduled for 6–8 October.

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