Signaling that the country is not yet ready for monetary tightening or an interest rate hike, the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Thursday left the key rates unchanged. principals – repo rate, reverse repo and discount rate – unchanged for the 10th time in a row and maintained the accommodating political orientation.
Stock markets applauded the decision, with the Sensex rallying over 400 points to trade at 58,883.80, and the Nifty gaining 126 points to 17,590.55 in intraday trading.
Explaining the rationale behind the decision, RBI Governor Shaktikanta Das said the MPC was of the view that continued policy support – the status quo on interest rates – was justified for a sustained and broad-based recovery after considering the outlook for inflation and growth, in particular the comfort provided by the improving outlook for inflation, the uncertainties related to Omicron and the global fallout.
No change in Repo rate
The central bank kept the repo rate – the rate at which the RBI lends funds to banks – at 4% to stimulate growth. This means that banks will not raise lending and deposit rates and EMIs on loans will remain unchanged.
The RBI has cut the key repo rate by 115 basis points to 4.0% and reverse repo rates by 155 basis points to 3.35% since February 2020. Since then, banks have significantly reduced their interest rates (both on deposits and on loans).
The large size of borrowings in the FY23 market, and the lack of progress on the inclusion of the Indian debt market in global bond indices, may have prompted the RBI to delay the normalization of liquidity in order to keep cost of large borrowing program under control, analyst says.
It also kept the Permanent Marginal Facility (FEM) rate and kept the discount rate unchanged at 4.25%.
Repo rate unchanged
Contrary to expectations of a hike, the RBI kept the reverse repo rate – the rate at which the RBI borrows money from banks – at 3.35%. Bond yields had climbed after the government announced an increase in market borrowing of Rs 14.95 lakh crore over the next financial year.
Markets expected now was the right time to opt for a 20 basis point hike in the repo rate as a wider corridor led to rate volatility. “We believe it would have been appropriate to start policy normalization with at least a 20bp rise in the reverse repo without too much market impact,” said Upasna Bhardwaj, senior economist at Kotak Mahindra. Bank.
The accommodative policy stance must continue
The political panel, by a 5-1 majority, decided to maintain the dovish stance “for as long as needed to revive and support growth on a sustainable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within target in the future”.
While the current ‘policy accommodation for as long as needed to revive growth’ stance was due for scrutiny, analysts said the RBI should wait a while longer as the economic recovery is uneven and the variant Omicron rocked the sentiment.
The global trend is towards tightening liquidity, with the US Federal Reserve is expected to raise rates soon.
On Thursday, MPC member Jayanth Varma voted against keeping the dovish policy.
Inflation to moderate
The RBI has forecast consumer price inflation (retail) of 5.3% for the current financial year 2021-22 (FY22) despite rising crude oil prices.
Retail price inflation for the next fiscal year (FY23) is projected at 4.5%, below previous projections.
The MPC noted that inflation is expected to moderate in the first half of 2022-2023 and come closer to the target rate, leaving room to remain accommodative thereafter. Timely and relevant supply-side measures by the government have been instrumental in containing inflationary pressures, he said.
The RBI would prefer the government to reduce excise duties to ease the pressure on inflation. Additionally, ongoing supply constraints could add to cost pressures, already evident in WPI inflation, which has persisted at double-digit levels for the past nine months. Food inflation is also expected to rise further due to supply bottlenecks and unfavorable weather conditions as the base effect declines. Oil prices are already above $90 a barrel and threatening to rise. Inflation risks, particularly related to fuel prices, remain a concern and may materialize fairly quickly, an analyst said.
The central bank has forecast real GDP growth of 7.8% for the next fiscal year (2022-23), while real GDP growth of 9.2% for 2021-22 puts it slightly above the level of GDP in 2019-20.
“The recovery in domestic economic activity is not yet widespread, as private consumption and contact-intensive services remain below pre-pandemic levels,” the MPC said.
With the Covid pandemic impacting the recovery, analysts expected a slight downward revision to the GDP growth rate for FY22. Even though the economy showed a recovery, the first leading estimate of the GDP for the current fiscal year shows that it barely reached the pre-pandemic level.
In some contact-intensive sectors, the recovery has been slow and has yet to reach the level of 2019-20. These are the employment-intensive sectors, and two years of continuous drag have created a huge unemployment burden.
Virtually all the engines of growth, with the exception of public investment and exports, have been hesitant; private consumption and investment have yet to pick up, Brickwork Ratings said.
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