Mumbai: The Reserve Bank of India (RBI) on Friday left key interest rates unchanged at record lows and announced new measures to support the economy after the nascent recovery was pummelled by the devastating second wave of COVID-19 infections.
It brought down its forecast for economic growth by 100 basis points to a 9.5 percent real GDP growth in the current fiscal year ending March 31, 2022, while the inflation forecast was bumped up by 10 bps to 5.1 percent.
The six-member monetary policy committee (MPC) headed by Governor Shaktikanta Das voted unanimously for keeping repo rate - RBI's key lending rate - unchanged at 4 percent, and the reverse repo rate - the borrowing rate - at 3.35 percent.
''The MPC was of the view that at this juncture policy support from all sides is required to gain the momentum of growth that was evident in the second half of 2021, and to nurture the recovery after it has taken root,'' Das said.
It decided to retain an accommodative policy stance ''as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy,'' signaling there is still room to cut rates further.
RBI expanded its version of quantitative easing to keep borrowing costs anchored. It will buy an additional Rs 1.2 lakh crore of bonds under the Government Securities Acquisition Programme (G-SAP) 2.0 in the second quarter.
In April, RBI committed to buying Rs 1 lakh crore worth of government bonds from the market between April and May under G-SAP 1.0. Under G-SAP 1.0, RBI will purchase government securities worth Rs 40,000 crore on June 17.
The move is aimed at supporting the government's borrowing plan at comfortable interest rates.
The speed, scale, and severity of the second wave of COVID-19 have impacted the economic recovery. But Das said unlike the first wave of COVID-19 infections which brought the economy to an abrupt standstill under a nationwide lockdown, the impact of the second wave on economic activity is expected to be relatively contained with restrictions on mobility being regionalized and nuanced.
He said retail inflation is seen at 5.1 percent in 2021-22, with upside risks from higher commodity prices and re-emergence of higher supply constraints amidst the current phase of lockdowns.
Other announcements include a separate liquidity window of Rs 15,000 crore being opened till March 31, 2022, with tenors of up to 3 years at the repo rate, under which banks can provide fresh lending support to COVID-hit sectors such as hotels, restaurants, and tourism.
Further, an additional Rs 16,000 crore funding has been earmarked for Small Industries Development Bank of India (SIDBI) for lending to Micro, Small & Medium Enterprises (MSMEs), directly or indirectly over and above the quantum of Rs 50,000 crore that was set aside for government financial institutions in the April policy.
In order to provide further relief to the businesses hit by COVID 2.0, the newly announced restructuring window has been extended for all entities with outstanding credit of Rs 50 crore, up from Rs 25 crore.
Das said India's foreign exchange reserves have by all indications crossed USD 600 billion, a huge buffer that will help the economy from global spillovers and volatile external flows.
''At this point of time the MPC has very consciously taken the decision to focus on growth,'' he said.
RBI had slashed the repo rate by a total of 115 basis points (bps) since March 2020, to soften the blow from the pandemic.
Commenting on the announcements, Moody's Analytics said new coronavirus infections are on a declining trend, but with restrictions likely to be eased only gradually, the sharp slowdown in domestic demand is set to weaken the revival beyond the June quarter.
The RBI is expected to maintain an accommodative stance over the next two quarters despite transitory inflation pressures while expanding liquidity measures to support recovery, it said.
''In the year gone by, the Reserve Bank has engaged in safeguarding the economy and the financial system from the ravages of the pandemic. We have been on continuous vigil - through the first wave; the lull between the waves; and now the second wave,'' Das said adding ''maintaining financial stability and congenial financing conditions for all stakeholders is a commitment that we have adhered to assiduously.'' The sudden rise in COVID-19 infections and fatalities has impaired the nascent recovery that was underway but has not snuffed it out. ''The impulses of growth are still alive,'' he said.
''We will continue to think and act out of the box, planning for the worst and hoping for the best,'' he noted.
