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The Reserve Bank of India (RBI) kept interest rates steady at record lows on Friday and reiterated its commitment to keeping policy accommodative as a second wave of COVID-19 infections threatens to derail the country's economic recovery.

The RBI held the repo rate, its key lending rate, at 4% and kept the reverse repo rate, the borrowing rate, unchanged at 3.35%.

In a Reuters poll, all 51 economists surveyed had expected the RBI's monetary policy committee (MPC) to leave rates unchanged as Asia's third-largest economy grapples with various state lockdowns.

COMMENTARY

MADHAVI ARORA, LEAD ECONOMIST, EMKAY GLOBAL FINANCIAL SERVICES, MUMBAI

"The bigger move was with regards to yield management as the RBI stressed on smooth liquidity management and orderly GSec borrowings, with a more vocal and defined GSAP.

"Overall, while we do not see any action on the policy rate front in the coming months, we are poised to see a more accountable and action-oriented RBI ahead. We reckon even as yields may inch up gradually and orderly, the RBI will continue to strive fixing skewed yield and maintain its preference for curve flattening (with GSAPs and OMOs). We see net OMO + GSAP purchases to the tune of 4.5 trillion rupees to 5 trillion rupees in FY22."

YUVIKA SINGHAL, ECONOMIST, QUANTECO RESEARCH, DELHI

"The RBI's reassurance of liquidity to markets with the announcement of a third tranche of GSAP 1.0 (G-Sec Acquisition Programme) and the next round of GSAP 2.0 of 1.2 trillion rupees ($16.44 billion) was on expected lines. Inclusion of SDLs in the GSAP programme is, however, a welcome step and is likely to curb the pressure on SDL spreads (which appears somewhat elevated at 75-80 bps currently).

"Among other support measures, liquidity window for contact-intensive services sectors comes as a much-needed lifeline to mitigate COVID-induced impact."

TANVEE GUPTA JAIN, CHIEF INDIA ECONOMIST, UBS, MUMBAI

"The monetary stance has been accommodative in the past year and the policy (repo) rate is already at an all-time low of 4%. However, despite negative real rates and record-low mortgage rates, credit impulse in the system has continued to remain weak.

"We expect the RBI to likely delay policy normalisation until next year (March 2022 quarter) and to keep financing conditions easy in the interim to support economic recovery and ensure the smooth functioning of the government's borrowing calendar."

DEEPTHI MATHEW, ECONOMIST, GEOJIT FINANCIAL SERVICES, KOCHI

"In an expected move, the RBI maintained the status quo in policy rates. To support and revive the economy, the RBI would continue with the accommodative stance as long as it is needed.

"The announcement of G-SAP 2.0 at 1.2 trillion rupees ($16.44 billion) for Q2FY22 shows the RBI's commitment to keeping the bond yields in check. The inclusion of SDL on G-SAP would support state government borrowings from the market."

SAKSHI GUPTA, SENIOR ECONOMIST, HDFC BANK, GURUGRAM

"We expect Q1 growth at 15-16% as rural demand takes a hit and supply chain disruptions weigh on economic activity.

"The RBI revised up its inflation forecast to 5.1%. We see further upside risks to this forecast as input cost pressures continue to rise and feed into retail prices over the coming months. The announcement and increase in GSAP 2.0 amount is likely to bring further relief for the bond market. Inclusion of state development loans (SDLs) in the GSAP is likely to provide some relief for states borrowing costs with states under increased fiscal pressure due to the second wave.

"We expect 10 year yield at 5.95-6.05% for the coming months."

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

"The RBI kept policy rates unchanged as expected and predictably downgraded FY22 GDP forecast by 1 PPT to 9.5%. The central bank continues to maintain a conservative stance on CPI (5.1% for FY22 vs. 4.9% three-quarter average previously). To tackle likely pressures on domestic interest rates, the RBI highlighted presence of $600 billion foreign exchange reserves as a deterrent ahead of a crucial FOMC meeting and gave predictable indications on RBI bond buying program, G-SAP 2.0.

"In addition, there were other credit facilitation measures for severely impacted high-contact services sectors."

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

"The RBI scaled down its rather optimistic growth forecast for FY22 from 10.5% to 9.5%, in line with the worries expressed by them in several forums earlier as well as in their annual report about growth momentum hitting a roadblock, especially given the weakened pace of vaccination, which lies at the heart of recovery.

"In fact, we do expect further downward revision going forward as more and more high frequency data is expected to exhibit levels of activity that will not be able to justify as high a real growth as 9.5%. The central bank has also raised their FY22 inflation forecast a tad from 5% y/y to 5.1%, in line with our expectations.

"Not surprisingly, they assured that they would remain accommodative for as long as the economy needs and would ensure adequate liquidity in the system. That said, we believe that expecting the RBI to do all the heavy lifting for an economy suffering from massive demand destruction, is rather unfair on the central bank. Under the current circumstance, monetary policy ought to play a supporting role to a more expansionary fiscal stance especially in the form of fiscal support to households suffering from loss of jobs and incomes. Unfortunately, like the first wave, none seems to be on the way."