India Monetary Policy June 2021

India: Reserve Bank of India keeps rates unchanged in June

At its monetary policy meeting ending on 4 June, 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.

On one hand, the Bank judged that additional easing was not warranted, as domestic Covid-19 cases have fallen sharply since their early May peak, auguring a subsequent easing of lockdown measures. Moreover, an expected normal monsoon 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.

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. A majority of panelists see rates unchanged this year, although a few panelists see hikes.

Commenting on the RBI’s latest meeting, Barnabas Gan, an economist at United Overseas Bank, noted:

“With the ambitious G-SAP program and higher inflation risks in 2021, we expect the RBI to keep its policy repo rate unchanged at 4.0% for the rest of 2021.”

However, analysts at Nomura took a different view:

“We expect the weight assigned to inflation to rise as the year progresses, as ongoing vaccinations reduce growth uncertainty and inflationary pressures remain elevated. We expect discussions on policy normalization to begin later this year and maintain our baseline view of a reverse repo rate hike in Q4 and 50bp of repo rate hikes in H1 2022.”

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