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India maintains low rates over Covid-19 concerns

The Reserve Bank of India (RBI) has kept interest rates low in favour of an accommodative monetary policy over fears of frustrating economic recovery efforts due to increasing Covid-19 cases.

The banking authority has maintained its key lending rate at 4 percent, while the reverse ratio is kept at 3.35 percent.

“The MPC judged that monetary policy should remain accommodative till prospects of sustained recovery are well secured,” Shaktikanta Das, governor of the RBI stated.

This move by the Reserve Bank of India contrasts with the Egyptian central bank’s decision last March to keep monetary easing on a pause, thus, keeping interest rates as high as possible.

In order to achieve the planned inflation target of 7 percent at plus or minus 2 basis points in the fourth quarter of 2022, the central bank of Egypt (CBE) maintained a high-interest rate of 8.75 percent.

According to Bloomberg, China, India, Russia and Mexico are predicted to further cut down rates. Argentina and Nigeria are, however, expected to embark on an interest rate hike.

The emerging market economy of India whose booming stock market and outperforming currency makes it a choice destination for foreign investments may be worried that the novel covid-19 pandemic will hurt post-crisis economic recovery efforts.

Read Also: Will Africans take COVID-19 vaccine?

Siddhartha Sanyal, chief economist at the Bandhan Bank of India says that “Against the backdrop of a large government borrowing and renewed uncertainties with a fresh surge in Covid-19 infections, a key challenge for the RBI is to maintain orderly conditions in financial markets”.

Furthermore, Siddhartha Sanyal asserts that “despite the upward revision in inflation forecasts, which we feel is largely due to supply-side issues…the sharp knee-jerk positive reaction by the bond market after today’s monetary policy and related announcements is clearly justified”.In order to ease the blows dealt by the pandemic, the RBI slashed the cash reserve ratio by a total of 115 basis points (bps) since March 2020. This follows a 135 bps worth of rate cuts since early 2019.

The Indian monetary policy committee has shown by its low-interest-rate policy, its decision to prioritise growth over other monetary policy goals. In this way, the RBI has committed 1 trillion rupees ($13.54 billion) in open market operations (OMO) to ease liquidity pressures in the government securities (G-Sec) market.

Accordingly, RBI’s MPC announced that it will grant retail investors direct access to G-Secs and bonds, both in the primary and secondary markets respectively.

Prithviraj Srinivas, chief economist at Axis Capital, Mumbai further notes that “500 billion rupees refinancing facility have been announced for NABARD, NHB and SIDBI as a precautionary measure against credit concern-led liquidity tightness. The RBI remains committed to keeping financial conditions accommodative given the headwinds to growth from the second COVID-19 wave”.

Also, the cash reserve ratio (CRR), which is the percentage of commercial bank’s total deposits kept with the central bank, was restored by the RBI according to CNBC-TV18 reports. The restoration process is in two phases.
The first CRR restoration kicked off on March 27, 2021, at 3.5 percent while the second phase is expected to take effect on May 22, 2021, at 4 percent.

In view of a recovery stance, the RBI maintained unchanged policy rates, gross domestic production (GDP) and consumer price index (CPI) forecasts. Boosting the economy in the face of an uncertain demand market and northward inflation outlook necessitated efficient smooth liquidity management by India’s monetary authority.

With a focus on reversing the effects of Covid-19 on the economy’s growth, Shaktikanta Das said that India’s growth potentials may only be reached if appropriate monetary responses are focused on ensuring price stability.

“Going forward, the Indian economy is poised to move in only one direction and that is upwards. It is our strong conviction, backed by forecasts, that in 2021/22, we would undo the damage that COVID-19 has inflicted on the economy,” RBI governor Shaktikanta Das said.

Following the country’s accommodative policy, the governor admits that the growth outlook for the country has considerably been progressive, and the price level is expected to remain within RBI’s forecast range over a respectable time frame.

“Outlook on growth has improved significantly”, he said.

Furthermore, medical intervention through the massive roll-outs of vaccines throughout the globe is expected to yield positive growth impulses for the country. This healthcare intervention programme is a timely augment to the RBI’s monetary agenda.

Beginning from fiscal year (FY) April 2021, India’s central bankers have projected a growth rate of 10.5 percent. This comes after a long battle with the stabbing effects of the popular coronavirus outbreak which had a tight choke on India’s economy.

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