As widely expected, the RBI’s Monetary Policy Committee (MPC) maintained status quo on the policy repo rate with economic recovery still nascent and even as it assessed that the recent inflation pressures are transitory.

While the six-member MPC voted unanimously to keep the policy repo rate unchanged, the vote to continue with the accommodative stance was decided by a 5 to 1 majority.

The committee held its hand on the repo rate despite the retail inflation projection for FY22 being upped to 5.7 per cent from 5.1 per cent. The revised projection is only 30 basis points below the RBI’s upper tolerance level of 6 per cent.

The repo rate was last cut in May 2020 from 4.40 per cent to 4 per cent.


GDP rate projection

While retaining the overall real GDP rate projection at 9.5 per cent, the first quarter projection was revised upwards but the next three quarterly projections have been revised downwards.

In an indication that the central bank is taking baby steps towards normalisation of its ultra-easy monetary policy, it decided to conduct four fortnightly variable rate reverse repo (VRRR) auctions of 14-day tenor to absorb the banking system’s surplus liquidity, which, as on August 4, was at ₹8.50-lakh-crore.

RBI Governor Shaktikanta Das, however, emphasised that the VRRR auctions should not be misread as a reversal of the accommodative policy, as the amount absorbed under the fixed rate reverse repo is expected to remain more than ₹4-lakh crore at September-end.

VRRR auctions

The central bank will conduct fortnightly VRRR auctions of ₹2.5-lakh crore on August 13; ₹3- lakh crore on August 27; ₹3.5-lakh crore on September 9; and ₹4-lakh crore on September 24.

Asked if the monetary policy was sending mixed signals, Das said: “We are in the midst of an extraordinary situation arising from the pandemic.... There are many conflicting objectives which the RBI has to manage.”

Das underscored that a pre-emptive monetary policy response at this stage may kill the nascent economic recovery.

Bond market spooked

But the bond market snubbed the RBI. The upward revision in inflation spooked the market, with the price of the benchmark 10-year G-Sec declining about 20 paise to close at ₹99.01 (previous close: ₹99.2125), with yield rising about 3 basis points to close at 6.2345 per cent (6.2067 per cent). “The RBI’s policy has not quite convinced the markets which is demanding more (in terms of yield). We can link this with the higher government borrowing and expected inflation which is keeping the markets edgy,” said Madan Sabnavis, Chief Economist, CARE Ratings.