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RBI Monetary Policy Committee Highlights: The Monetary Policy Committee (MPC) kept key repo rate unchanged but hiked the reverse repo rate by 40 bps to 3.75 percent on April 8 and emphasized on the need of withdrawal of accommodation in its first policy meeting of FY23. This is the eleventh time in a row that the MPC headed by RBI Governor Shaktikanta Das has maintained the status quo of repo rate.
Here are the key takeaways of Reserve Bank of India Governor Shaktikanta Das’ speech:
The MPC has kept the repo rate unchanged at 4 percent while increasing the reverse repo rate to 3.75 percent from 3.35 percent earlier. Also, the panel continued with the so-called ‘accommodative’ stance in the backdrop of elevated level of inflation and heightening of geo-political tensions.
“MPC voted unanimously to leave the repo rate unchanged at 4 percent and to keep stance accommodative”, RBI Governer Shaktikanta Das said in his speech. However, reverse repo rate was hiked to ensure liquidity.
RBI also rewrites its stance to less accommodative as it rephrases its accommodative stance to focus on withdrawal of accommodation.
It insisted on gradual, calibrated withdrawal of liquidity over multi-year time frame, in a non-disruptive manner beginning this year.
Inflation is now projected to be higher and growth lower than February’s expectations.
The RBI lowered is projected GDP growth for FY23 to 7.2 percent from 7.8 percent that was projected in the last meeting. Assuming oil at $100. GDP growth seen at 16.2 percent in April-June 2022; at 6.2 percent in July-September 2022; at 4.1 percent in October-December 2022; and at 4.0 percent in January-March 2023.
CPI inflation seen averaging higher 5.7 percent in FY23 compared to 4.5 percent projected earlier. It is seen averaging 6.3 percent in April-June 2022; seen averaging 5.0 percent in July-September 2022; seen averaging 5.4 percent in October-December 2022; and seen averaging 5.1 percent in January-March 2023.
Spike in crude oil since February end poses substantial risk to inflation. The projection of inflation is fraught with risk and contingent to global crude prices.
“Projection of global inflation ratcheted up risks of sizeable impact across geographies in global production. Cost pressure and supply chain disruptions are likely to linger on”, Das said
RBI has decided to restore liquidity adjustment facility (LAF) corridor to 50 bps, as it was before the pandemic. MSF Rate and Bank Rate remain unchanged at 4.25 percent.
The central bank has introduced Standing Deposit Facility SDF), which will form the floor of the Liquidity Adjustment Facility corridor.
The governor pointed out that normalisation of LAF corridor done today should not come as a suprise to market participants. According to him the financial markets were prepared for the LAF corridor over past several months.
SDF is being introduced to provide symmetry to operating framework of monetary policy and will have 3.75 percent interest rate. Access to SDF, MSF will be at the discretion of the banks.
RBI expects CAD to stay at sustainable levels during the current financial year which can be financed with normal capital flows.
Overview
Since March 2020, the central bank has cut its key lending rate, or repo rate, by 115 basis points to support the economy in the face of economic fallout from the pandemic.
The RBI last cut its policy rate on May 22, 2020 in an off-policy cycle when COVID-19 posed an unprecedented challenge to the economy. Since then, the central bank has maintained the repo rate-- the rate at which RBI lends money to commercial banks -- steady at a 19-year low of 4 percent. The reverse repo rate -- the rate at which the RBI borrows from banks -- is 3.35 percent.
The government has mandated the central bank to keep the inflation rate at 4 percent (+,- 2 percent).
Factors of importance
The ongoing Russia-Ukraine conflict and surging oil prices are pushing the cost of commodities higher, resulting in rising inflationary trends.
The government has mandated the central bank to keep the inflation at 4 percent, with an upper and lower tolerance level of 2 percent.
After the February MPC meeting, the RBI had decided to hold its key lending rates steady at record low levels for the 10th straight meeting to support a durable recovery of the economy.
Schedule for FY23
Meanwhile, the RBI has released a detailed the meeting schedule of its MPC for FY23.
As per the RBI Act, the MPC must meet a minimum of four times in a year, with the meeting schedule for a year to be published by the central bank at least one week before the first meeting for that year.
The six-member MPC is widely expected to make no change to the policy repo rate in its first meeting of FY23. This was held between April 6-8.
Further, the next MPC will meet on June 6-8, August 2-4, September 28-30, and December 5-7, before closing out FY23 with its final meeting in February 6-8, 2023, the RBI said in a statement on March 30.
The RBI will release its six-monthly Monetary Policy Report next week along with the MPC's resolution. The Monetary Policy Report will be keenly eyed for the central bank's inflation forecasts and the assumptions underpinning them.
With global crude oil prices skyrocketing in the wake of Russia's invasion of Ukraine, all eyes will be on the price of India's crude oil basket the RBI assumes in its models while arriving at its inflation forecast.
Stay tuned for the latest news, developments and updates on the expectations, announcement and reactions today!
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"We continue to expect the RBI to make the first rate hike move in June, failing which August would be a certainty. However, we fear that any delay in rate hike would force the RBI to possibly do a Fed (Federal Reserve) and start tightening at a much faster pace, choking the process of recovery," saidKunal Kundu, India Economist, Societe Generale.
"India's real GDP growth at 5.4% in Q3 of FY22 is primarily driven by a strong growth in the services sector's value and a pick-up in private final consumption spending. While growth in agriculture has slowed in Q3, the construction sector has become negative,"Nitsure said."On the positive side, the levels of real spending, whether by the private sector or the government sector, are higher than the pre-pandemic levels. Given the encouraging trends in government's revenues and spending until January 2022, and the upward revision in the nominal GDP growth rate for FY22, the fiscal deficit to GDP ratio for FY22 may come out to be better than what was projected in the (Union) Budget," she added. (Reuters)
"Among the key takeaways from the policy review was firstly the MPC's caution over the growth trajectory, and worry over persistent inflation, which was underscored by a 60 bps cut in the growth projection and 120 bps increase in the inflation forecast, backed by a sharp $25 per barrel increase in the underlying crude oil price assumption," said Radhika Rao, Economist, DBS Bank.
"Policymakers also acknowledged fluidity in the geopolitical situation and its spillover on the commodity universe. Secondly, a tweak in the guidance to acknowledge the need to start withdrawal of accommodation leaves the June rate review live for a change in the stance to neutral and explore rate hikes thereafter," she added.
