India cenbank holds rates but raises inflation forecast

The Reserve Bank of India held rates at record lows on Friday, but it raised its inflation forecast and said it would normalise liquidity conditions in a signal that policymakers could be edging closer to tapering pandemic-induced stimulus.

As widely forecast, the RBI held the repo rate, its key lending rate, at 4 per cent and kept the reverse repo rate , the borrowing rate, unchanged at 3.35 per cent.

All 61 economists polled by Reuters late last month had said they see no change in the repo rate which has been steady at 4 per cent since May last year.

“The need of the hour is not to drop our guard and to remain vigilant against any possibility of a third wave especially in the background of rising infections in certain parts of the country,” RBI Governor Shaktikanta Das said in a virtual address accompanying the MPC’s decision.

All members voted in favour of the decision to hold rates and a 5-1 majority supported retaining the accommodative monetary policy stance, Das said.

The RBI also announced four variable rate reserve repo (VRRR) auctions of a larger-than-expected quantum, one each fortnight, over August and September to restore normal liquidity operations and raised its 2021/22 inflation forecast to 5.7 per cent from 5.1 per cent before.

“This should not be misread as a reversal of the accommodative policy stance,” Das told reporters, adding that the VRRR window is purely voluntary.