India: RBI forecast to keep rates unchanged this year – UOB

Economist at UOB Group Barnabas Gan assesses the latest interest rate decision by the Reserve Bank of India (RBI).

Key Quotes

“The Reserve Bank of India (RBI) kept its policy repo rate and reverse repo rate static at 4.00% and 3.35% respectively on Friday, in line with market expectations. This is the fourth time that the RBI has kept its policy repo rate unchanged, following a 40bps cut during an unscheduled meeting on 22 May 2020.”

“However, policy-makers decided to hike its Cash Reserve Ratio (CRR) “in two phases in a non-disruptive manner”. The CRR will be increased by 50bps to 3.5% (from 3.0%) effective 27 March 2021, and eventually to 4.0% effective 22 May 2021. The CRR, which had been cut by 100bps in 1Q20, was aimed at allowing banks flexibility to tide over the disruption caused by COVID-19.”

“The latest policy statement reiterated that the accommodative stance will stay for “as long as necessary”, at least for the current and next financial year. This is needed to revive growth & mitigate the impact of COVID-19, as well as to ensure that inflation stays within target range of between 2.0% and 6.0%.”

“India’s growth prospects will depend largely on how COVID-19 evolves. Importantly, macroeconomic indicators have been recovering, while the outlook is also expected to improve further with the rollout of the vaccine programme across the country. In all, with the better macroeconomic backdrop and strong fiscal response seen in the Union Budget, we expect RBI to keep its policy rate unchanged for the whole of 2021.”