RBI Holds Interest Rate Steady at Record Low of 4%

Mumbai: The Reserve Bank of India (RBI) held its key lending rates steady at record low levels for the 10th straight meeting to support a durable recovery of the economy from the COVID-19 pandemic.

RBI Governor Shaktikanta Das said the monetary policy committee decided to hold the lending rate, or the repo rate, steady at 4%, and its reverse repo, or the rate at which it absorbs excess cash from lenders - unchanged at 3.35%.

The six-member MPC, which has been on pause since August 2020, voted unanimously to maintain the status quo on the repo rate and by a majority of 5-1 to retain the accommodative policy stance as long as necessary, he said.

"Monetary policy actions will be calibrated and well telegraphed," he said, indicating that there won't be any surprises.

"Overall, taking into consideration the outlook for inflation and growth, in particular the comfort provided by improving inflation outlook, the uncertainties related to Omicron and global spillovers, the MPC was of the view that continued policy support is warranted for a durable and broad-based recovery," he said.

While a status quo on repo rate was expected, some economists had expected a hike in the reverse repo to re-align it with short-term money market rates.

The decision comes days after Finance Minister Nirmala Sitharaman proposed to up spending to support the economy's world-beating recovery. 

Lower Economic Growth Rate Forecast

RBI projected a 7.8% economic growth  rate in the coming fiscal starting April 1, down from 9.2% expected in 2021-22, in view of uncertainties on account of pandemic and elevated global commodity prices.

It lowered the inflation outlook to 4.5% for the next fiscal from 5.3% in the current year.

Retail inflation accelerated to a five-month high of 5.59% in December from a year earlier, while wholesale price-based inflation eased marginally to 13.56%, but remained in double-digits for nine straight months.

The "headline inflation is expected to peak in Q4:2021-22 (January-March 2022) within the tolerance band and then moderate closer to target in H2:2022-23, providing room for monetary policy to remain accommodative," he said.

Other decisions announced include curtailment of the hours when reverse repo and MSF windows can be availed -- a return to pre-pandemic methods of managing liquidity. Variable repo, reverse repo of 14-day will be the main liquidity tool while auctions of longer maturity will be conducted as needed. 

Term-liquidity facility to emergency health services

The RBI proposed to extend the term-liquidity facility of Rs 50,000 crore offered to emergency health services by three months till June 30, 2022.

Last year in May, RBI had announced an on-tap liquidity window of Rs 50,000 crore, at the repo rate with tenures of up to three years, to boost provision of immediate liquidity for ramping up COVID-19-related healthcare infrastructure and services in the country.

Banks were incentivised for quick delivery of credit under the scheme through extension of priority-sector classification to such lending up to March 31, 2022.

"In view of the response to the scheme, it is now proposed to extend this window up to June 30, 2022 from March 31, 2022 as announced earlier," RBI said in the statement on Development and Regulatory Policies on Thursday.

Under the scheme, banks were expected to create a COVID-19 loan book.

By way of an additional incentive, such banks were eligible to park their surplus liquidity up to the size of the COVID-19 loan book with the RBI under the reverse repo window at a rate of 25 bps lower than the repo rate, i.e., 40 bps higher than the reverse repo rate.

Up to February 4, 2022, banks have deployed their own funds of Rs 9,654 crore towards COVID-19-related emergency health services, RBI said.

The central bank also extended the on-tap liquidity window for contact-intensive sectors up to June 30, 2022.