RBI October Monetary Policy: Economic activity up but recovery uneven; inflation trajectory more favourable, says Shaktikanta Das

Repo rate is the rate at which banks borrow money from the Reserve Bank while reverse repo rate is the rate at which RBI borrows from banks. Commercial banks borrow funds only if they witness a shortfall in their funds. The monetary policy committee of a country uses the reverse repo rate as a tool to control the money supply in the country.

The central bank has left the key rates unchanged for the eighth consecutive time. It had last revised the policy rate on May 22, 2020 in an out-of-turn announcement amid the coronavirus lockdown to boost demand by cutting interest rate to a historic low.

The Marginal Standing Facility (MSF) rate also remains unchanged at 4.25 percent.

The announcement is in line with the Street's expectations as it was largely expecting status quo. However, analysts anticipated a revised guidance on liquidity amid rising global commodity prices and domestic inflation.

Inflation continues to remain a big worry on the back of the demand-supply imbalance. Economists also believe the high commodity prices we have seen through the year have not been fully passed through consumers.

Governor Shaktikanta Das said that the RBI has taken more than 100 measures to proactively respond to the unprecedented crisis. India is in a much better place today than at the time of the last MPC meeting, said Das.

According to him, growth impulses are strengthening, and inflation trajectory is more favourable than expected. CPI inflation during July-Aug turned out to be lower than expected, as per Das.

The FY22 CPI inflation forecast has been lowered to 5.3 percent from 5.7 percent earlier. The Q2 FY22 CPI inflation is seen at 5.1 percent against 5.9 percent earlier while Q3 FY22 CPI is seen at 4.5 percent compared to 5.3 percent earlier. The Q4 FY22 CPI inflation forecast is retained at 5.8 percent while Q1 FY23 inflation is seen at 5.2 percent.

Macro indicators suggest economic activity has gained momentum, said Das, adding that improvement in monsoon in September, Kharif production, adequate food stock buffer, and lower vegetable prices will likely keep food inflation muted.

However, the governor said that while the overall demand is improving, slack still remains as recovery is uneven. "Output is below pre-pandemic levels; supply-side and cost pressures impinging on inflation," said Das.

Das said GDP showed resilience as the 20.1 percent growth in Q1 was close to MPC's forecast of 21.4 percent. Recovery in aggregate demand gathered space in Aug-Sept, according to Das, who added that ebbing of infections has been supporting private consumption.

​Support from aggregate demand from government consumption is also gathering pace and recovery in services is also gaining traction, however, contact intensive services are still lagging, said Das.

The RBI has retained FY22 real GDP growth forecast at 9.5 percent. Q2 FY22 GDP growth is seen at 7.9 percent against 7.3 percent earlier while Q3 FY22 GDP growth is seen at 6.8 percent vs 6.3 percent earlier. Q4 FY22 GDP growth forecast is retained at 6.1 percent and Q1 FY23 GDP growth forecast is maintained at 17.2 percent.

In an important announcement, Das said the need to undertake further GSAP operations at this point did not arise but RBI will remain in preparedness to conduct it if and when needed. It proposed to undertake 14-day VRRR auctions fortnightly, starting today, till December 3. Depending on evolving liquidity conditions, pace of government expenditure, the RBI may consider complementing 14-day VRRR actions with 28-day VRRR auctions.

Das said VRRR should not be interpreted as reversal of accommodative policy stance. "V in VRRR will also represent voluntary; no compulsion for banks to put money in this window," he said.

The governor said that the regulator does not want "surprises", hence the policy approach will be calibrated and more of gradualism. "Don't want to rock the boat when we are so close to the shore," said Das.

Among other non-policy measures, special 3-year LTRO of Rs 10,000 crore for SFBs was extended till December 31, proposal to introduce framework for retail digital payments in offline mode, proposal to increase per-transaction IMPS limit to Rs 5 lakh from Rs 2 lakh were announced.