The Reserve Bank of India (RBI) kept the benchmark repo rate unchanged at 4% and vowed to maintain monetary easing as long as required to recover from the impact of the Covid-19 pandemic.
The central bank’s decision follows a fresh wave of Covid infections across the country forcing partial lockdowns in the financial hub Mumbai and the national capital Delhi. Several other states have also been forced to implement new curbs on movement.
However, the bank made no change to its economic growth projection for the current fiscal year at 10.5% despite the risks posed by Covid. A day earlier, the International Monetary Fund raised India’s economic growth projection for FY22 to 12.5% from 11.5% estimated in January.
The Reserve Bank of India also extended fresh support of 500 billion rupees to domestic financial institutions for the current fiscal year, out of which half of the amount will be provided to the National Bank for Agricultural and Rural Development (NABARD) to support agriculture and related sectors. Micro, small and medium enterprises will get credit support of 150 billion rupees under the program.
The Covid outbreak has squeezed demand and particularly affected small and medium firms. Only about half of such firms in the country have taken advantage of easier credit facilities initiated by the central bank.
The Reserve Bank estimated that inflation would rise to 5.2% in the first half of the current fiscal year from 5% in the January-March period, and later ease to 4.4% in the third quarter. Prices of several commodities such as steel and metals have risen, but prices of food staples have remained stable following good monsoon rains in the last season. Predictions are that the annual monsoon is likely to be bountiful even this year.
However, rising prices of crude oil remains a worry because the fuel is the biggest drain on the country’s foreign exchange. India has recently started to reduce its dependency on crude oil imports from the Middle East following a sharp increase in prices, although diversifying to other sources is challenging because of longer distances as well as difference in composition which makes it more difficult to process by Indian refiners.