RBI keeps policy repo rate unchanged at 4%

Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.

The MPC also decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of the Coronavirus on the economy, while ensuring that inflation remains within the target going forward.

RBI said these decisions were made on the basis of an assessment of the current and evolving macroeconomic situation and are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

Since the MPC’s meeting in April, RBI said, the global economic recovery has gained some momentum, driven mainly by major advanced economies (AEs) and powered by massive vaccination programmes and stimulus packages. However, economic activity remains uneven in major emerging market economies (EMEs), with downside risks from renewed waves of infections due to contagious mutants of the virus and the relatively slow progress in vaccination. 

RBI noted some recovery in world merchandise trade with the resumption of external demand, though elevated freight rates and container dislocations are emerging as constraints. Also, a firming up of consumer price inflation in most AEs, driven by release of pent-up demand, elevated input prices and unfavourable base effects. Inflation in major EMEs has been generally close to or above official targets in recent months, pushed up by the sustained rise in global food and commodity prices. Global financial conditions also remain benign, RBI adds.

On the domestic front, provisional estimates of national income released by the National Statistical Office (NSO) on 31 May 2021 placed India’s real gross domestic product (GDP) contraction at 7.3 per cent for 2020-21, with GDP growth in Q4 at 1.6 per cent year-on-year (y-o-y). 

However, there are both positive and negative indicators. While the India Meteorological Department’s (IMD) forecast of a normal south-west monsoon, with rainfall at 101 per cent of the long period average (LPA), augurs well for agriculture, a rise in coronavirus infections in rural areas, however, indicates a sequential decline in consumption demand.

Industrial production showed a broad-based improvement in March 2021. While mining and electricity output surpassed March 2019 (pre-pandemic) levels, manufacturing did not catch up. The output of core industries recorded double digit y-o-y growth in April 2021, propelled by a weak base. Although GST collections were at their highest during April 2021, there are indications of moderation in May as reflected in lower E-way bills generation. Other high-frequency indicators – electricity generation, railway freight traffic, port cargo, steel consumption, cement production and toll collections – recorded sequential moderation during April-May 2021, reflecting the impact of restrictions and localised lockdowns imposed by states with exemptions for specific activities.

Headline inflation registered a moderation to 4.3 per cent in April from 5.5 per cent in March, largely on favourable base effects. Food inflation fell to 2.7 per cent in April from 5.2 per cent in March, with prices of cereals, vegetables and sugar continuing to decline on a y-o-y basis. While fuel prices surged, core (CPI excluding food and fuel) inflation moderated in April across most sub-groups barring housing and health, mainly due to base effects. Inflation in transport and communication remained in double digits.

System liquidity remained in large surplus in April and May 2021, with average daily net absorption under the liquidity adjustment facility (LAF) amounting to Rs5.2 lakh crore. Reserve money (adjusted for the first-round impact of the change in the cash reserve ratio) expanded by 12.4 per cent (y-o-y) as of 28 May 2021, driven by currency demand. Money supply (M3) and bank credit grew 9.9 per cent and 6.0 per cent, respectively, as on 21 May 2021, compared with growth of 11.7 per cent and 6.2 per cent, respectively, a year ago. 

India’s foreign exchange reserves increased by $21.2 billion in 2021-22 (up to 28 May) to $598.2 billion.

Going forward, RBI expects the inflation trajectory to be shaped by uncertainties impinging on the upside and the downside. The rising trajectory of international commodity prices, especially of crude oil, together with logistics costs, pose upside risks to the inflation outlook. Excise duties, cess and taxes imposed by the centre and states need to be adjusted in a coordinated manner to contain input cost pressures emanating from petrol and diesel prices, RBI aid. 

One redeeming factor is a normal south-west monsoon along with comfortable buffer stocks that should help keep cereal price pressures in check. RBI expects the recent supply side interventions to help ameliorate the tightness in the pulses market. Further supply side measures are needed to soften pressures on pulses and edible oil prices. With declining infections, restrictions and localised lockdowns across states could ease gradually and mitigate disruptions to supply chains, reducing cost pressures. Weak demand conditions may also temper the pass-through to core inflation. Taking into consideration all these factors, CPI inflation is projected at 5.1 per cent during 2021-22: 5.2 per cent in Q1; 5.4 per cent in Q2; 4.7 per cent in Q3; and 5.3 per cent in Q4:2021-22; with risks broadly balanced.

Turning to the growth outlook, RBI said rural demand remains strong and the expected normal monsoon bodes well for sustaining its buoyancy, going forward. The increased spread of corona virus infections in rural areas, however, poses downside risks. Urban demand has been dented by the second wave, but adoption of new pandemic-compatible occupational models by businesses for an appropriate working environment may cushion the hit to economic activity, especially in manufacturing and services sectors that are not contact intensive. On the other hand, the strengthening global recovery should support the export sector. Domestic monetary and financial conditions remain highly accommodative and supportive of economic activity. Moreover, the vaccination process is expected to gather steam in the coming months and should help to normalise economic activity quickly. Taking these factors into consideration, RBI projects real GDP growth at 9.5 per cent in 2021-22, consisting of 18.5 per cent in Q1; 7.9 per cent in Q2; 7.2 per cent in Q3; and 6.6 per cent in Q4:2021-22.