The Reserve Bank of India left its key interest rates unchanged on Thursday, defying expectations for a quarter-point reduction, as it tries to keep inflation in check after the economy started showing signs of a gradual recovery as businesses started opening up following the relaxation of the lockdown restrictions to battle the coronavirus pandemic.
However, the Indian central bank acknowledged that the economic outlook remain highly uncertain as the rising number of Covid-19 cases keep the threat of a second wave of infections alive.
The Monetary Policy Committee, led by Governor Shaktikanta Das, unanimously decided to hold the repo rate unchanged at 4 percent, the central bank said in a statement.
The reverse repo rate was held steady at 3.35 percent and the marginal standing facility rate and the Bank Rate at 4.25 percent.
"The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward," the bank said.
"Given the uncertainty surrounding the inflation outlook and taking into consideration the extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, it is prudent to pause and remain watchful of incoming data as to how the outlook unravels," the bank said.
Policymakers decided to stay on hold with regard to the policy rate and remain watchful for a durable reduction in inflation to use the available space to support the revival of the economy, the RBI said.
On Thursday, the RBI also decided to provide a window to enable lenders to implement a resolution plan in respect of eligible borrowers.
The central bank targets CPI inflation of 4 percent within a band of +/- 2 percent. The statistical office did not release the headline CPI figures for April and May citing the disruptions caused by the pandemic.
"With the growth outlook worsening amid the continued spread of the coronavirus, and inflation set to ease, we still think that the easing cycle has further to run," Capital Economics economist Shilan Shah said.
The research firm forecast a 50 basis point reduction before the end of the year, and more if the economic outlook worsens further.
In May, the RBI had cut the repo rate by 40 basis points. Since February 2019, the bank has cut the rate by a cumulative 250 basis points.
The central bank expressed concern over the surge of fresh infections that have forced re-clamping of lockdowns in several cities and states.
"We shall remain alert and watchful and collectively do whatever is necessary to revive the economy and preserve financial stability," Das said.
The bank expects headline inflation to remain elevated in September quarter of 2020-21 and prices pressures to ease in the second half of the fiscal year, thanks to large favorable base effects.
Upside risks to food prices remain, while the inflation outlook for non-food categories is fraught with uncertainty, the RBI said.
Real GDP growth is expected to be negative for the year 2020-21, as a whole, the bank said.
An early containment of the COVID-19 pandemic may impart an upside to the outlook, the RBI noted.
A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks, the bank added.
The recovery in the rural economy is forecast to be robust due to better agricultural prospects and the manufacturing situation is expected to improved gradually in coming quarters as domestic demand strengthens.
External demand is expected to remain anemic, the central bank said, citing the global recession and the decline in global trade.
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