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RBI holds rates steady, sees economic recovery taking root

MUMBAI (Reuters) - The Reserve Bank of India (RBI) left key interest rates unchanged on Friday as widely expected, while keeping policy accommodative to help pull the coronavirus-ravaged economy out of its worst slump in four decades.

FILE PHOTO: A worker walks past the logo of Reserve Bank of India (RBI) inside its office in New Delhi, India July 8, 2019. REUTERS/Anushree Fadnavis

India’s economy has been the worst hit by the pandemic among major countries and new infections continue to climb, but RBI Governor Shaktikanta Das said there were some encouraging signs of a business turnaround and activity could return to growth in the January-March quarter.

As expected, the monetary policy committee (MPC) kept the repo rate, its key lending rate, at 4.0%, while the reverse repo rate or the key borrowing rate stayed at 3.35%.

The RBI has slashed the repo rate by 115 basis points (bps) since late March to cushion the shock from the coronavirus crisis and sweeping lockdowns to check its spread.

The RBI sees India’s real GDP contracting by 9.5% in the current fiscal year, Das said in a webcast after the MPC meeting.

“The MPC is of the view that revival of the economy from an unprecedented COVID-19 pandemic assumes the highest priority in the conduct of monetary policy,” he said.

“The MPC decides to maintain status quo on the policy rate in this meeting and await the easing of inflationary pressures to use the space available for supporting growth further.”

August inflation, at 6.69%, held above the top end of the RBI’s medium-term target range of 2-6% for the fifth consecutive month amid supply disruptions.

“The main reason for inaction today was the stickiness of inflation,” said Shilan Shah, senior India economist at Capital Economics in Singapore.

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But Shah expects prices to cool in coming months, in line with the view of the RBI, which would give policymakers room to ease policy again.

“We think there is scope for another 50bp of rate cuts, which is a more dovish view than currently discounted in financial markets.”

India's major stock indexes .NSEI, .BSESN rose 0.25% after the central bank's decision, while the 10-year benchmark bond yield fell by 7 basis points to 5.9630 and the rupee traded at 73.10 per dollar.

RECOVERY TAKING ROOT

Asia’s third-largest economy was already facing a cyclical downturn before the pandemic and is now expected to mark its first full-year contraction since 1979 as millions are left unemployed.

India has 6.84 million coronavirus cases, the second highest in the world, and its COVID-19 death toll has surged past 100,000, the third highest after the United States and Brazil.

“I think the RBI expects that India’s battle with COVID-19 will be a long drawn one and hence they have been selective in using monetary policy so that they have some buffer that they can use in the event there is a strong second or third wave,” said Amit Shah, head of India research at BNP Paribas.

Governor Das said a renewed rise in infections remains a serious risk, but said factories and cities were slowly returning to normal while consumers were turning more upbeat.

The rural economy looks resilient and food grain production was set to hit new records after a good monsoon, Das said.

“In cities, traffic intensity is rising rapidly; online commerce is booming; and people are getting back to offices,” he said. “The mood of the nation has shifted from fear and despair to confidence and hope.”

However, he noted that the rebound would not be a swift, V-shaped one, and rather forecast a 3-speed recovery, with some sectors like agriculture and allied activities set to bounce back first and others likely to improve more gradually.

Reporting by Swati Bhat and Euan Rocha; Additional reporting by Mumbai and Bangalore newsrooms; Editing by Simon Cameron-Moore and Kim Coghill

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