Market experts cheered the continued focus on growth by the Reserve Bank of India’s Monetary Policy Committee (MPC) in its first bi-monthly meeting for the current financial year.
The MPC retained the repo rate at 4 percent while reducing the policy rate corridor to the pre-pandemic level of 50 basis points through the reintroduction of the standing deposit facility (SDF) at 3.75 percent.
The central bank also raised its forecast for inflation in 2022-23 to 5.7 percent from 4.5 percent, while downgrading GDP estimate to 7.2 percent from 7.8 percent.
Dalal Street veterans said that the focus on growth even when inflation pressure in the economy is rising bodes well for investors, given that the economic recovery is still not broad-based in the central bank’s own assessment.
“The RBI has chosen to support growth over inflation by keeping the rates at the same level. We believe it is a sensible choice because for India to attract foreign capital it will have to focus on generating growth,” said Abhay Agarwal, founder and fund manager at Piper Serica Advisors.
Agarwal argued that the RBI has not signalled a series of rate hikes that will increase the cost of borrowing and negatively impact the nascent recovery in consumer sentiment, manufacturing and rural income.
Domestic benchmark indices moved into the green following the conclusion of the RBI Governor Shaktikanta Das statement.
At 12:15 pm, the Nifty was higher by 0.3 percent at 17,696.5 points and the Sensex was up 0.3 percent at 59,190.5 points.
Despite the concerns raised by the rate-setting committee on inflation, it retained its so-called accommodative stance on policy but indicated that it would focus on withdrawing this accommodation to ensure inflation remains within its targeted band of 2-6 percent.
Das, however, said the panel has now placed inflation over growth in its sequence of priorities, given the likely impact of soaring global commodity prices led by crude oil.
Global crude oil prices have jumped above the $100 a barrel mark over the past month following Russia’s invasion of Ukraine.
“The RBI is not only sensitive to market needs but has been explicitly committed to do what it takes to support the Indian economy, without caring for ‘rule books’,” said Manoj Trivedi, co-founder at Jama Wealth.
Strategists expect the MPC to move towards higher interest rates in the coming meeting, given that the central bank now sees inflation “perilously close” to the upper band of the targeting mechanism.
“We believe, over the medium-term, policy rates are likely to gradually inch up,” said Naveen Kulkarni, chief investment officer at Axis Securities.
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