India Monetary Policy February 2021

India: Reserve Bank of India keeps rates unchanged in February

At its monetary policy meeting ending on 5 February, 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 decision to stand pat was mainly the result of recovering but still-subdued economic activity and relatively strong inflationary pressures, driven predominately by supply chain disruptions and rising fuel costs. That said, the Bank noted that easing food costs in December had lowered households’ short-term inflationary expectations since its previous meeting in November, while improving economic sentiment and the rollout of the vaccine has brightened the economic outlook in recent weeks. Nevertheless, the Bank decided to keep rates unchanged to ensure economic conditions continue to improve, while it noted that it would closely monitor the inflation outlook.

Regarding the outlook, all members of the committee stated the current accommodative stance should stay in place until at least the start of the next fiscal year to support the economic recovery, while ensuring inflation remains within the 2.0%–6.0% target range.

Commenting on the RBI’s latest meeting, analysts at Goldman Sachs noted:

“We maintain our expectation that RBI will keep policy rates on hold this year, while tightening liquidity in a gradual and calibrated manner beginning with the CRR hikes in March and May. […] RBI is also likely to hike the reverse repo rate to restore policy corridor symmetry in 2H2021. The key risk to our view is if inflation rebounds meaningfully (for eg: if pent-up cost pressures from surging global commodity prices lead firms to hike retail prices of manufactured goods and services as demand improves) which could cause RBI to normalize policy sooner than we currently expect.”

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