RBI holds rates steady, sees economic recovery taking root

By Swati Bhat and Euan Rocha
MUMBAI (Reuters) - The Reserve Bank of India (RBI) left policy rates unchanged on Friday, as widely expected, while adjusting policies to bring the coronavirus-stricken economy out of its worst slump in four decades.
India's economy has been hardest hit by the pandemic among large countries, and the number of new infections continues to rise. However, RBI Governor Shaktikanta Das said there were some encouraging signs of reversal and activity could pick up again in the January-March quarter.
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As expected, the Monetary Policy Committee (MPC) kept the repo rate, its policy rate, at 4.0% while the reverse repo rate, or policy rate, remained at 3.35%.
The RBI has reduced the repo rate by 115 basis points (basis points) since the end of March to cushion the shock from the coronavirus crisis and to stop the lockdown to check the spread.
The RBI expects India's real GDP to shrink 9.5% in the current fiscal year, Das said in a webcast after the MPC meeting.
"The MPC believes that reviving the economy after an unprecedented COVID-19 pandemic is the top priority in conducting monetary policy," he said.
"The MPC resolves to maintain the status quo of the policy rate at this meeting and wait for inflationary pressures to ease in order to use the space available to further support growth."
The inflation rate in August was 6.69% for the fifth year in a row above the upper end of the RBI's medium-term target range of 2 to 6% as supply was interrupted.
"The main reason for inactivity today was the stickiness of inflation," said Shilan Shah, senior Indian economist with Capital Economics in Singapore.
But Shah expects prices to cool down in the coming months, in line with the RBI's view, which would give policymakers room to loosen politics again.
"We believe there is scope for further rate cuts of 50 basis points, which is a more cautious view than currently discounted in financial markets."
India's major equity indices <.NSEI>, <.BSESN> rose 0.25% after the central bank decision, while benchmark 10-year bond yields fell 7 basis points to 5.9630 and the rupee at 73.10 per dollar was traded.

Asia's third largest economy faced a cyclical downturn before the pandemic and is now expected to see its first full year decline since 1979 as millions of people remain unemployed.
India has 6.84 million coronavirus cases, the second highest in the world, and the death toll from COVID-19 has risen over 100,000, the third highest after the US and Brazil.
"I think the RBI expects India's fight against COVID-19 to be lengthy, so they have used monetary policy selectively so that they have a buffer to use in the event of a strong second or third wave "said Amit Shah, Head of Indian Research at BNP Paribas.
Governor Das said a renewed spike in infections was still a serious risk, but factories and cities were slowly returning to normal as consumers became more optimistic.
The rural economy looks resilient and food grain production should hit new records after a good monsoon, Das said.
"In cities, traffic is increasing rapidly, online commerce is booming and people are returning to the office," he said. "The mood of the nation has changed from fear and despair to trust and hope."
He noted, however, that the upswing would not be rapid and V-shaped, but rather forecast a three-speed recovery, with some sectors such as agriculture and allied activities likely to recover first and others likely to improve gradually.

(Reporting by Swati Bhat and Euan Rocha; additional reporting by newsrooms in Mumbai and Bangalore; editing by Simon Cameron-Moore and Kim Coghill)

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