Due to persisting inflation, no change in interest rates: RBI chief

Data available for the third quarter confirms that the economy is recuperating faster than anticipated and more sectors are joining the multi-speed upturn.

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The Reserve Bank of India (RBI) on Friday gave a cautious thumbs-up to the economy even as it kept the interest rates unchanged as inflation remained well above the upper end of the target band.

Data available for the third quarter confirms that the economy is recuperating faster than anticipated and more sectors are joining the multi-speed upturn. Corporate results for the second quarter also indicate that demand conditions are recovering and profit margins are rising on the back of cost saving on expenses and debt servicing capacity has gone up.

“At the same time, the signs of recovery are far from being broad-based and are dependent on sustained policy support,” warned the RBI’s Monetary Policy Committee which met over three days for a stock-taking of the economy.

Against the backdrop of the folding up of two private banks in quick succession, RBI chief Shaktikanta Das said the Central Bank was committed to preserving depositors’ interest in the financial system.

Although India is technically in a recession because of negative growth in two quarters, the GDP will enter positive territory in the third quarter (October-December). In the final quarter of 2020-21, it would grow by 0.7 per cent. Overall, the fiscal will end with a (-) 7.5 per cent de-growth, reckoned the RBI chief.

The RBI had earlier expected GDP to contract by 9.5 per cent.

He pointed at some high-frequency indicators with double-digit growth such as some automobile sales, railway freight traffic and electricity consumption. But private investment is still slack and capacity utilisation has not fully recovered.

Inflation remains a worry though it is not of the runaway category. The MPC felt that inflation is likely to remain elevated, with some relief in the winter months from prices of perishables and kharif arrivals.

While cereal prices may continue to soften with the bumper kharif harvest arrivals and vegetable prices may ease with the winter crop, other food prices are likely to persist at elevated levels, it said.

The RBI has decided on a five-pronged strategy: (i)enhance liquidity support to targeted sectors having linkages to other sectors; (ii)deepen financial markets; (iii)conserve capital among banks and NBFCs through regulatory initiatives; (iv) strengthen supervision through strengthening the audit functions; (v)facilitate external trade by improving ease-of-doing business for exporters; and (vi)upgrade payment system services so as to expand financial inclusion and improve customer service.

“The MPC decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of Covid on the economy, while ensuring that inflation remains within the target going forward,” said the RBI chief.

As interest rates were unchanged for the third time, Das said the RBI would use other instruments to ensure ample liquidity in the system. He announced measures to deepen the corporate bond market and supervisory measures for the shadow banking sector.

The RBI raised the limit of contactless card transactions to Rs 5,000 per usage from the current Rs 2,000, with effect from January 1. Also, real-time gross settlement systems (RTGS) would be available round-the-clock in the next few days, he said.

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