RBI keeps key rates unchanged, inches towards reducing excess liquidity

The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) kept its policy rates and accommodative stance unchanged in today’s meeting. It held economic recovery post second wave of the Covid-19 pandemic was still nascent and maintained that the shadow of rising inflation would pass. But its announcement of greater absorption of surplus liquidity through variable rate reverse repo (VRRR) operations could be read as the beginning of its imminent exit from unconventional monetary easing.

The RBI has reiterated its support to economic recovery as of now by maintaining low rates and conducive financial conditions. However, with growth expected to gain momentum in the second half of this fiscal, and inflation remaining elevated, we expect monetary policy to tighten in the coming months. The US Federal Reserve is also expected to begin tapering bond purchases by end-2021, further reducing scope for the RBI to continue its present policy stance. We therefore, expect a hike in repo rate by 25 basis points (bps) by end-fiscal 2022.