RBI keeps policy rates unchanged, banking on easing inflation
The Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) kept policy rates unchanged and stance accommodative at its review meeting today. Policy rates have been left untouched since the start of the pandemic, and the gap of 65 basis points (bps) between repo rate and reverse repo rate remains well wider than the 25 bps seen before the pandemic. The central bank believes it has the space to remain accommodative, expecting inflation to move within its target range of 2-6%, and even falling next fiscal.
Monetary policy remains inclined towards supporting growth. The RBI believes it has space to stay accommodative based on the expectation that headline inflation will stay within its target range. However, with growth recovering from the brief impact of the third Covid-19 wave and becoming more broad-based next fiscal, the RBI could soon turn towards managing rising risks from external factors. Surging crude oil prices pose a risk to major macros in the Indian economy, including inflation. The US Federal Reserve is expected to raise rates six times in 2022 — the fastest pace since the 2008 Global Financial Crisis. Given this, we expect the RBI to start raising the repo rate next fiscal. We foresee three rate hikes of 25 bps each, with the first move in April.
Highlights of the February monetary policy
The MPC voted unanimously to keep the repo rate unchanged at 4%. Reverse repo rate was maintained at 3.35%, and marginal standing facility at 4.25%
It voted 5-1 to continue the accommodative stance
The MPC has projected gross domestic product (GDP) growth at 7.8% in fiscal 2023, compared with 9.2%1 in the current fiscal
MPC expects consumer price index (CPI)-based inflation reduce to 4.5% in fiscal 2023 compared 5.3% in fiscal 2022
The RBI will have a dynamic approach to managing liquidity in accordance with the liquidity management framework of February 2020
The limit on foreign portfolio investment (FPI) in the debt market through the voluntary retention route (VRR) will be increased from Rs 1.5 lakh crore at present to Rs 2.5 lakh crore from April 2022
On-tap liquidity facility for contact-intensive sectors and emergency health services will be extended from March 2022 to June 2022
1 First Advance Estimate by National Statistical Office (NSO)
