RBI keeps rates unchanged but has lowered growth forecast for the year

NIFTY 15 minute chart

India's central bank released minutes of the Monetary Policy Committee meeting today. In fact, the press conference is still ongoing, as I write this post. The central bank kept the policy rate unchanged at 4%. What was interesting was the rationale.

The reserve bank believes that a good monsoon and global growth can act as tailwinds for the economy. However, the bank also acknowledged that negatives for the economy are COVID-19 spreading in rural India and low demand from both urban and rural areas.

The bank seemed hopeful that the government will be able to vaccinate people fast enough and that too will aid in economic growth, during the latter half of the year.

On inflation, the central bank believes that lower demand will keep prices in check, and a good monsoon will keep vegetable prices in check. Govt. action to improve supply for other consumables will also help in keeping a check on inflation.

The bank is also trying to channelize the flow of liquidity to end borrowers. For example, the central bank is allowing retail banks to borrow money from the RBI by using their loan book of loans made to spas, travel agents, and the likes, at a rate 25 bps lower than the policy rate.

The conference is still ongoing but let's consider what the central bank is saying. If lower demand will keep inflation in check, then we do not want that. The country would like to see growth improve further, thus boosting demand. Loan growth is abysmally slow at the moment. Why will companies borrow? Demand isn't there. What will a company do with borrowed money?

The central bank's hopes of better vaccination also highlight its helplessness. There was no mention of newer waves, or mutations, or other major risks that the economy faces. Unfortunately, they can't be very vocal about government actions. I also have questions about how a good monsoon will help us. Sure, it will ease inflation pressures, but what about rural income. Demand from hotels is absent. Food prices are low. Rural income is at its lowest in 14 years. A good monsoon means that there is no uptick in rural income and high inflation will adversely impact demand.

I think the RBI did what it had to do. Keep policy accommodative, provide liquidity support and keep rates unchanged. It's uncertain times and the policy decision has been made according to the situation.

The market has barely reacted to this conference. Rupee did slip slightly and yield has moved up a bit.

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