India’s central bank leaves lending rates unchanged; expects farm-led economic recovery

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IAC Picture by Parivartan Sharma

India’s central bank left the benchmark lending rate unchanged and vowed to maintain its accommodative monetary policy to facilitate the economy’s recovery in wake of the covid pandemic.

The Reserve Bank of India (RBI) maintained the repo rate at 4% and the reverse repo rate at 3.35%. At the same time, the bank announced a raft of measures to boost liquidity for a number of sectors. Interest rates have been reduced by as much as 115 basis points this year.

“The Indian economy is entering into a decisive phase,” RBI governor Shaktikanya Das said, adding that a number of indicators are pointing to an easing of the challenges in the economy. 

“GDP may break out of contraction and turn positive by Q4,” he said.

Read | Governor’s statement

Several rating agencies recently predicted that India’s economic growth rate could decline by more than 10.5% during the current fiscal year, but Das said that he was optimistic that the worst was behind for the economy. 

With the country likely to get a bumper summer crop output, the current inflation rate of 6 percent is expected to ease by the fourth quarter of the fiscal year, he said.

Das also said that agriculture and allied activities are likely to  lead the economic rebound. India experienced two successive strong monsoon seasons which has emerged as a ray of hope amid the economic devastation triggered by the pandemic.

The RBI decided to provide on tap Targeted Long-Term Refinancing Operations to provide long term loans to banks to encourage them to increase their lending to businesses and consumers. The central bank also announced it would conduct special and outright bond purchases.

The bank also plans to conduct Open Market Operations next week worth Rs 20,000 crore in order to further boost liquidity. It also rationalised risk weightage for home loans in order to provide relief to buyers as well as the construction sector.

The RBI also announced real-time gross settlement would be provided through the day over the course of next one year. It refers to a funds transfer system that allows for the instantaneous transfer of money and or securities. 

Read | RBI’s Monetary Policy Report October 2020

Biman Mukherji is a columnist and consulting editor at Indoasiancommodities.com. He has worked for international news organisations such as Reuters, The Wall Street Journal as well as for newspapers like The Times of India. He can be reached at biman.mukherji@indoasiancommodities.in

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