With Omicron on its mind, RBI holds key interest rates to support growth

It is not yet clear whether Omicron variant would be equally or more virulent than Delta but its emergence has stoked the fears of a prolonged pandemic as countries are resorting to entry restrictions that may further disrupt the global supply chains. India also put on hold its decision to resume normal flight operations from the middle of this month writes ETV Bharat's Krishnanand Tripathi.

New Delhi: After two-day long deliberations in Mumbai, the Reserve Bank’s Monetary Policy Committee unanimously decided to keep the crucial interbank lending rates, the repo rate and reverse repo rate, unchanged at 4% and 3.35% respectively. The committee also decided to maintain the accommodative stance by a majority of five-to-one to support the economic growth that is recovering from the adverse economic impact of the Covid-19 but needs support for a broad-based and durable recovery.

After the meeting, Reserve Bank Governor Shaktikanta Das announced that the repo rate remained unchanged at 4% and the reverse repo rate also remained unchanged at 3.35%.

The repo rate is the short-term interbank lending rate at which banks borrow money from the Reserve Bank and they deposit their surplus funds with the RBI at the reverse repo rate.

Any change in the repo and reverse repo rate has a direct impact on borrowers, particularly the retail borrowers who borrow home loan, auto loan and personal loans from banks and other financial institutions. Any increase in repo rate leads to increase in the monthly EMI outgo as banks link interest rates on loans to Repo Linked Lending Rate (RLLR).

The committee has also decided to keep the marginal standing facility (MSF) rate and the bank rate unchanged at 4.25 per cent.

It means the home loans and auto loans linked to another benchmark used by the banks for deciding interest rate on loans, the Marginal Cost of Funds based Lending Rate (MCLR), would also remain unchanged.

In addition to maintaining the status quo on interest rates, the monetary policy committee also decided to maintain an accommodative stance in fiscal policy 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. It means the RBI will continue to maintain a high level of liquidity in the system to make credit available to industry and retail borrowers.

Talking about the economic growth outlook for the country, Governor Shaktikanta Das said the Indian economy had literally hauled itself out of one of the deepest contractions witnessed in April-June period of the FY 2020-21. He said the GDP growth of 13.7% in the first six months (April-September) of the current fiscal was in line with the RBI’s projection.

“In several sectors of the economy, pre-pandemic levels of output have been crossed,” he observed. According to the RBI, the GDP will register a growth of 9.5% in the current fiscal (April-March 2022) period.

Das projected GDP growth to be 6.6% in the third quarter (October-December) and 6% per cent in the fourth quarter (January-March 2022). He said GDP was projected to grow at 17.2% in April-June 2022 and 7.8% in July-September period next year.

Omicron fear looms

Shaktikanta Das also warned against the risks to GDP growth projections due to the emergence of Omicron variant of the SarS-CoV-2 virus, and also due to the elevated prices of crude oil and other commodities in the global market and prolonged supply bottlenecks caused by the outbreak of Omicron variant.

The Omicron variant of Covid-19 virus, which was first reported to the World Health Organization (WHO) from South Africa late last month, has already been declared a variant of concern (VoC) by the global health body. It is considered more transmissible than the Delta variant of the virus which was first identified in India early this year and was responsible for the ferocious second Covid wave in April-May this year that killed more than 2,50,000 people.

The Delta variant later became the dominant variant in Europe and the US and was responsible for a large number of deaths across the globe this year.

It is not yet clear whether Omicron variant would be equally or more virulent than Delta but its emergence has stoked the fears of a prolonged pandemic as countries are resorting to entry restrictions that may further disrupt the global supply chains. India also put on hold its decision to resume normal flight operations from the middle of this month.

Inflation

Talking about the inflation, Das said it was broadly aligned with the target of 4% except for some short-term spikes.

He said the uptick in headline retail inflation to 4.5% in October from 4.3% in September was mainly fueled by a spike in vegetable prices due to unseasonal rains in some parts of the country.

He, however, expressed concerns over hardening international energy prices that have kept domestic LPG and kerosene prices elevated for nearly three quarters, edging up fuel inflation to 14.3% in October.

“The persistence of high core inflation (CPI inflation excluding food and fuel) since June 2020 is an area of policy concern in view of input cost pressures that could rapidly be transmitted to retail inflation as demand strengthens,” said the RBI Governor.

Das said the reduction of excise duty and value added tax (VAT) on petrol and diesel would bring about a durable reduction in inflation by way of direct effects as well as indirect effects operating through fuel and transportation costs.

Das said the inflation may be under pressure in the immediate term but vegetable prices were expected to be corrected with the arrival of winter crops and bright prospects for the Rabi crop.

“Over the rest of the year, inflation prints are likely to be somewhat higher as base effects turn adverse, however, it is expected that headline inflation will peak in the fourth quarter of FY 2021-22 and soften thereafter,” the RBI governor noted.

He said the retail inflation was expected to cool down to 5% in April-June next year and stay at the same level for some time.

Future Outlook

RBI governor said globally economies were opening up and activity levels were reaching pre-pandemic levels but the recurrence of COVID-19 waves in many parts of the world including the appearance of the Omicron variant, stubborn inflation and headwinds from continuing supply bottlenecks cast a shadow on the outlook.

He said the Indian economy was relatively well-positioned on the path of recovery but it could not remain immune to global spillovers or to possible surges of infections from new mutations including the Omicron variant.