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Today's RBI policy may be most crucial after March 2020: Key indicators to watch

Most experts reckon that the central bank will refrain from tinkering with interest rates amid concern that its focus on boosting economic growth will put it behind the curve in tackling inflation.

April 08, 2022 / 06:25 AM IST

Reserve Bank of India (RBI) Governor Shaktikanta Das will unveil the first monetary policy of the new financial year today, after a two-day review amid concern over inflation that is quickening on the back of higher crude oil and other commodity prices.

The review by the six-member Monetary Policy Committee (MPC) led by Das will likely indicate the course RBI will adopt in the remainder of financial year 2023 as it seeks to strike a fine balance between sustaining growth and curbing inflationary pressures in the economy.

This week’s monetary policy announcement is seen as the most crucial since the one announced by RBI in March 2020 when COVID-19 was reaching Indian shores after sparking worldwide concern over its impact on global growth.

Although active COVID-19 cases have declined sharply across the country, commodity prices, especially of crude oil, have soared amid uncertainties spurred by the Russia-Ukraine conflict.

After nearly three years, inflation is emerging as a bigger challenge than growth for the rate-setting panel. The annual inflation rate accelerated for a fifth straight month to 6.07% in February, the highest since June 2021. It was the second successive month that inflation had broken above the 6% upper end of the central bank’s comfort zone.

Even so, according to economists who participated in a poll conducted by Reuters, RBI is likely to stand pat on April 8 rather than tinker with interest rates and risk disrupting growth impulses.

Experts are concerned that RBI’s stance will put the central bank behind the curve in tackling inflation at a time when its global peers are tightening policy to douse inflationary fires. Maintaining a relatively loose policy now will potentially force RBI to aggressively play catch-up at a later stage, they say.

Also Read: CPI inflation jumps to 6.01% in January 2022, highest in seven months


Economists expect RBI to raise its retail inflation projection for the new fiscal year by 50 to 80 basis points from the current 4.5 percent. One basis point is one-hundredth of a percentage point.

''At the margin, inflation risks dominate the downside risk to growth. On our estimates, it will average above 6 percent in FY23 , so we see the 6 percent upper band getting breached for three consecutive quarters,'' Sonal Varma, managing director & chief economist at the Japanese securities house Nomura, said in an exclusive interview to CNBC-TV18.

This reflects higher fuel prices, gas prices, a narrowing output gap, reopening of services, higher global food prices, and rising cost of food production, she added. Inflation is no longer a just supply-side effect, Varma said.

In a research report, Nomura said RBI was likely to re-evaluate its projection for both gross domestic product (GDP) growth and retail inflation in this week’s policy meeting.

RBI may suggest that inflationary pressures are temporary, and that the rate will remain below the upper end of comfort zone, and that monetary policy should remain supportive of growth.

Change of stance?

There exists a reasonable likelihood that the RBI will take its first, albeit reluctant, step towards policy rate normalisation by changing its monetary policy stance from 'accommodative' to 'neutral' – a step it is likely to balance with dovish commentary, according to Nomura.

"We believe the RBI is overly optimistic on inflation, and that a course correction in monetary policy is warranted. We expect a policy pivot in June and hence are building in 100bp in cumulative repo rate hikes in 2022," the report said.

Also Read: RBI likely to maintain status quo in policy rate next week, say experts


RBI has sold a net $20 billion since mid-January and $19 billion in the January-March quarter of FY22. The FY22 net liquidity addition because of forex purchases is around Rs 1 lakh crore.

''RBI has been tightening its liquidity stance, which is getting reflected in our financial conditions index -- that significantly tightened from where it was post COVID-19,” said Samiran Chakraborty, India chief economist at Citibank, in an interview with CNBC-TV18.

RBI has been steadily reducing its balance sheet size from October, he added. On the scope of a government securities acquisition programme (G-SAP) announcement, Chakraborty is not hopeful it will happen in the upcoming MPC meeting.

''Unlike last year, this year the scope for a G-SAP announcement appears to be more limited, and it would be more of a verbal comfort this time, rather than an explicit G-SAP. But if the RBI announces some OMO for April, the market would get an indication or even some comfort out of it,'' said Chakraborty.

OMO is short for Open Market Operation.

Also Read: As inflation tests RBI, managing expectations may get painful


The Centre for Monitoring Indian Economy’s monthly data revealed that the overall unemployment rate in India was 8.1 percent in February and fell to 7.6 percent in March. On April 2, the ratio dropped to 7.5 percent, with the urban unemployment rate at 8.5 percent and rural at 7.1 percent.

Abhirup Sarkar, a retired professor of economics who worked at the Indian Statistical Institute, said although the overall unemployment rate was falling, it was still high for a “poor” country like India.

“Poor people, particularly in rural areas, cannot afford to remain unemployed, for which they are taking up any job that comes their way,'' he said.

Also Read: Barclays India's Rahul Bajoria: RBI is prioritising growth


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).​
Nikita Prasad