RBI's decision to keep repo rate unchanged to support economic growth: Experts

The RBI's decision to keep the repo rate unchanged for yet another term is in line with the unfinished agenda of supporting India's economic growth, exacerbated by the COVID-19 second wave, financial market experts said on Friday. The six-member Monetary Policy Committee (MPC) of the Reserve Bank in its latest policy decision kept the key repo rate unchanged for the 7th consecutive time at 4 per cent, with an accommodative stance, primarily to support growth in the wake of the pandemic impact.

The RBI believes nurturing growth has to be a priority. With vaccination steadily rising and economic activity and exports gathering pace, it is perhaps time to consolidate and build further on the evolving growth impulse, Sunil Kumar Sinha, Principal Economist, India Ratings and Research said.

The Reserve Bank of India has continued with its line of supporting growth despite the recent spikes in inflation, Abheek Barua, Chief Economist, HDFC Bank, said.


"The RBI announced an increase in the quantum of the variable reverse repos (VRRR) by Rs 2 lakh crore and also provided forward guidance on systemic liquidity... This liquidity normalisation should be viewed as a gentle calibrated move, partly in response to large excess liquidity surplus in the system, and not as an aggressive rollback of monetary policy support," Barua said.

The central bank in January 2021 re-introduced the VRRR (variable-rate reverse repo auctions).

"Today's RBI policy is once again an indication that interest rates both lending and deposit rates will continue to remain low and is unlikely to go up in a couple of quarters.

"This bodes well for all interest-sensitive sectors, including real estate and the auto industry, among others. Lower interest regime may result in an uptick in demand in the run-up to the festive season," said V Swaminathan, CEO Andromeda and Apnapaisa.

The MPC will likely strive to support growth for as long as possible to achieve the "as-yet-incomplete" growth revival, Icra MD & Group CEO N Sivaraman said.

He said the liquidity support measures were incremental after the broad-based support to the acutely affected sector in the past few policies.

"With the substantial surplus in systemic liquidity conditions, the gradual incremental absorption through the VRRR (variable-rate reverse repo auctions) should not materially impact the near term rates," Sivaraman noted.

Tata Capital Ltd MD & CEO Rajiv Sabharwal said the rebound in the economic activity post the second wave has been faster and it is imperative to build on this momentum. The decision demonstrates the RBI's unwavering resolve to support growth in the economy.

"The RBI is cognizant of sectoral asymmetry in credit transmission. The extension of on-tap TLTRO scheme and MSF (marginal standing facility) for banks should further channelise credit flows," Sabharwal said.

An increase in rates in this situation would have impacted overall growth. Despite the revised inflation forecast to 5.7 per cent for this fiscal, the silver lining is that there is a feeling that inflation will be transitory, Religare Enterprises Chairperson & Managing Director Rashmi Saluja said.

The increasing risks to inflation, especially as the economic activity is picking up pace has prompted the MPC into taking liquidity normalisation measures ahead of expectations, said Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank.

"We expect additional liquidity normalisation measures like overnight VRRR, increased quantum of higher tenure VRRR in the months ahead before expecting a reverse repo rate hike in December," she said.

The extension of TLTRO (targeted long term repo operations) till the calendar-end is positive and will give access to credit to lower-rated NBFCs. Higher rated NBFCs have ample liquidity, YS Chakravarti, MD & CEO, Shriram City Union Finance, said.

"The positive outcome of this window is that it has opened up access to long term investors like pension funds and insurance companies and that will benefit all," he added.