“As expected, the MPC has decided to keep policy rates on hold, while stating its intention to continue injecting more liquidity in financial markets, including buying government debt. Monetary policy was already very accommodative, with the real repo rate in negative territory. Despite inflationary pressures it seemed unlikely that the central bank would tighten policy as this could derail the recovery under way. The RBI does not expect CPI inflation in 2021-22 to exceed its upper target of 6%, so it understandably continues to focus on its secondary monetary policy target of stabilising the business cycle, which was already in serious trouble even before Covid-19. It may be observed that RBI’s accommodative stance long preceded the Covid downturn.

In view of the second wave RBI has cut its growth forecast for 2021-22 from 10.5% to 9.5%.

RBI also feels that the fear of taper tantrums and associated capital outflows has receded for now, although it continues to be watchful and conduct two way interventions in the FE market to maintain stability.

In his last statement the Governor had indicated that the RBI was working in close cooperation with government, leading to some speculation regarding an associated fiscal package to boost growth. While there was no such reference in today’s statement, this does not diminish the fact that with the continuing overhang of bad debt clogging the transmission channels of monetary policy, fiscal policy remains by far the most potent game in town for getting the economy back on track.”