RBI leaves rates unchanged as it lowers GDP growth projection to 9.5%, targets 5.1% inflation

• The Monetary Policy Committee (MPC) left rates untouched and maintained its ‘accommodative’ stance on economic recovery today, on June 4.
• It has revised its GDP growth projection for the Indian economy to 9.5% — 100 basis points lower than its earlier estimate of 10.5% in April.
• With its mandate to keep inflation within the 2-6% band, the MPC hopes to keep consumer inflation at 5.1% in 2021-22.

The Monetary Policy Committee (MPC), of the Reserve Bank of India (RBI), expectedly, left interest rates unchanged and is maintaining an ‘accommodative’ stance amid the uncertainty of the COVID-19 pandemic. India’s apex bank is in the same boat as many of its global peers in trying to balance inflation against the pressures of boosting economic growth.

Types of rate	What they do	Rate
Repo rate	The rate at which the RBI lends short-term funds to banks	4%
Reverse repo rate	The rate at which banks can park their with the RBI	3.35%

Reserve Bank of India (RBI) governor, Shaktikanta Das, disclosed that the MPC has revised its gross domestic product (GDP) projection for the ongoing financial year from 10.5% to 9.5% — lower by 100 basis points or 1%.

This is after India’s economy contracted by a massive 7.3% in the previous financial year

Time frame	Expected growth in India’s GDP for 2021-22
April-June	18.5%
July-September	7.9%
October-December	7.2%
January-March	6.6%

The forecast of a normal south west monsoon, the resilience of agriculture, the adoption of COVID compatible operational models by businesses, and the gathering momentum of global recovery are tailwinds that the MPC is hoping will lead to the revival of domestic economic activity once the second wave of COVID-19 abates.


Inflation is likely to remain elevated at 5.1%

The MPC’s mandate is to keep inflation within the prescribed limits of 2% to 6%. And, for the ongoing financial year, it expected the increase in prices to remain within 5.1%.

Time frame	Expected consumer price inflation (CPI) for 2021-22
April-June	5.2
July-September	5.4
October-December	4.7
January-March	5.3

The Consumer Price Index (CPI) was slightly lower in April at 4.2% — compared to 5.52% in March — but the onset of lockdowns and surge in COVID-19 cases has created a lot of disruption in the last one month. Nonetheless, Das is hopeful that the downswing will continue with the onset of a normal southwest monsoon and the second wave subsiding.


However, rising crude oil prices leading to a broad based surge in commodity prices and logistics costs, could worsen cost conditions. According to Das, weak demand conditions may temper the impact, and the pass through to consumer inflation.

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