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The Reserve Bank of India declared its determination to keep borrowing costs low for the government as well as corporates by buying more bonds from the market even as it maintained status quo on interest rates and monetary stance due to fragile economic recovery and price pressures.

Economic growth forecast was scaled down by a percentage point from earlier projections and inflation expectation was raised amid supply side disruptions signaling that the road to recovery could be bumpy.

The central bank raised its bond purchases under the Government Securities Acquisitions Programme by Rs. 20,000 crore to Rs. 1.2 lakh crore to temper the bond market fears after devolving many bonds in the past few months on primary dealers who demanded higher rates on government bonds.

Governor Shaktikanta Das promised to walk the path that would ensure that the economy recovers strongly and turns stable before the central bank does something to change its easy monetary stance.

“The Reserve Bank will continue to use all instruments at its command and work to revive and sustain growth on a durable basis,” Das said. “The MPC was of the view that at this juncture, policy support from all sides is required to regain the momentum of growth that was evident in the second half last fiscal and to nurture the recovery after it has taken root.”

The RBI and the Monetary Policy Committee have been juggling the need to revive economic growth after Covid ravaged businesses and at the same time rising price pressures due to supply side bottlenecks. Furthermore, the enormous global liquidity has fueled a sharp rally in commodity prices that’s threatening the MPC’s ability meet the inflation target of 4 percent, with an room to move in two percentage points on either side.

The MPC unanimously voted to keep the repo rate, the rate at which RBI lends to banks at 4 percent and the accommodative monetary stance. The reverse repo rate, the rate RBI pays banks for parking surplus remains at 3.35 percent. All other rates remain unchanged.

“Monetary policy hand-eye coordination is getting increasingly complicated, as the second wave is impacting growth comes at a time of rising inflationary pressures,” said Aurodeep Nandi, economist at Nomura Securities. “The RBI’s policy actions were largely on expected lines — keeping all three levers — rates, stance and forward guidance unchanged and dovish, while relying on G-SAP as a tool to deliver further accommodation and to prevent any premature tightening of financial conditions.”

The MPC decisions were in line with expectations. An ET poll showed that there would be a status quo on rates and stance and a possibility of reduction in growth projections.

The central bank lowered the GDP forecast by a percentage point this fiscal to 9.5 percent, from the earlier expected 10.5 percent as the second wave of Covid-19 led to various states announcing lockdowns.

“The increased spread of COVID-19 infections in rural areas, however, poses downside risks,” said Das. The inflation projection is at 5.1 percent, well above the target.

While lower growth rate and higher inflation poses a challenge to the monetary authorities who have been mandated with a target, the RBI said its primary objective at this juncture is to revive growth hence it would continue with easy monetary policy and wouldn’t hesitate to make it easier.

It enhanced the quantitative easing through the Government Securities Acquisition Programme or G-SAP to Rs. 1.2 lakh crore in the second quarter, up from Rs. 1 lakh crore in the first.

“With the second wave intensifying this financial year, the focus of the Reserve Bank is increasingly turning from systemic liquidity to its equitable distribution,” said Das. “In fact, the enduring lesson from the experience of the pandemic in the Indian context has been the deployment of unconventional monetary policy measures that distribute liquidity among all stakeholders. We shall continue with our proactive and pre-emptive approach.”

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