RBI Monetary Policy: Repo rate unchanged at 4% for the 11th consecutive time

The Marginal Standing Facility (MSF) rate and bank rate also were kept unchanged at 4.25 percent.

The RBI had last revised its policy repo rate or the short-term lending rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low.

Addressing the media after the monetary policy meeting, Das said that RBI will restore the liquidity adjustment facility (LAF) corridor to 50 bps, as it was pre-Covid. MSF Rate and bank rate remains unchanged at 4.25 per cent.

“The floor of the corridor will now be provided by the newly instituted standing deposit facility (SDF), which will be placed 25 basis points below the repo rate, i.e., at 3.75 per cent,” the governor said.

Speaking on the central bank’s stance, he said “It also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.”

Speaking about the reverse repo, Das said that the “fixed rate reverse repo (FRRR) rate is retained at 3.35 per cent. It will remain as part of RBI’s toolkit and its operation will be at the discretion of the RBI for purposes specified from time to time. The FRRR along with the SDF will impart flexibility to the RBI’s liquidity management framework.”

The RBI slashed the growth projection for the current fiscal to 7.2 per cent from 7.8 per cent earlier; while raising the inflation forecast to 5.7 per cent from 4.5 per cent.

Speaking on the GDP, Das said the real GDP growth for 2022-23 is now projected at 7.2 per cent with Q1 2022-23 at 16.2 per cent, Q2 at 6.2 per cent, Q3 at 4.1 per cent and Q4 at 4.0 per cent, assuming crude oil (Indian basket) at US$ 100 per barrel during 2022-23.

On the inflation rate forecast, Shaktikanta Das said inflation is now projected at 5.7 per cent in 2022-23, with Q1 at 6.3 per cent, Q2 at 5.8 per cent, Q3 at 5.4 per cent and Q4 at 5.1 per cent.

He added that given the excessive volatility in global crude oil prices since late February and the extreme uncertainty over the evolving geopolitical tensions, any projection of growth and inflation is fraught with risk, and is largely contingent upon future oil and commodity price developments.

In his speech, Das touched upon the liquidity and financial market conditions and said the RBI will continue to adopt a nuanced and nimble-footed approach to liquidity management while maintaining adequate liquidity in the system.

“At present, liquidity management is characterised by two-way operations: through variable rate reverse repo (VRRR) auctions of varying maturities to absorb liquidity; and variable rate repo (VRR) auctions to meet transient liquidity shortages and offset mismatches. This approach will be continued,” he said.

Interoperable card-less cash withdrawal at ATMs

In a bid to check fraud, the Reserve Bank on Friday decided to permit all banks to introduce card-less cash withdrawal through ATMs. Currently, card-less cash withdrawal through ATMs is a permitted mode of transaction offered by a few banks in the country on an on-us basis (for their customers at their own ATMs). Click here to read

How economists and market experts reacted:

• Dhiraj Relli, MD & CEO at HDFC Securities said “The latest RBI policy reflects hesitant hints to turn hawkish but sound dovish. The aggressive cut in GDP estimates for FY23 and sharp increase in FY23 inflation projections could mean some tightening measures going forward, reinforced by the change in stance to focus on withdrawal of accommodation. The current geopolitical events, supply chain issues and commodity price inflation are tying the hands of RBI and forcing it to gradually turn hawkish although it would like to continue with its pro growth outlook. 10 Year Gsec yields has risen to 7 per cent reflecting the concern of the street on the large borrowing program amidst the rising rates scenario.”

• V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said “Retaining the repo rate at 4 per cent and reverse repo to 3.35 per cent, continuing with the accommodative stance on expected lines. Recognising the new reality of higher crude triggered by the war the RBI, as expected, reduced the FY23 GDP growth rate projection to 7.2 per cent from 7.8 per cent earlier and raised the CPI inflation projection for FY23 to 5.7 per cent from 4.5 per cent earlier. This is based on the assumption of crude at $100. This implies that growth and inflation can be better if crude declines sharply if the war hopefully ends early. The reverse can be true if the war aggravates and crude spikes much above $100. The Governor rightly emphasized India’s macro strengths pointing to the improvement in the external situation helped by the record exports, ample forex reserves of $608 billion and strengthening of the financial sector. A new tool introduced by the central bank is the SDF ( Standing Deposit Facility) to absorb liquidity. SDF will be the floor of the LAF corridor”

• Nish Bhatt, Founder & CEO at Millwood Kane International said “The current RBI policy did not have any surprises, it kept rates unchanged for the 11th straight policy. But it has clearly laid out the path to policy unwinding. The focus from now on will be to withdraw the accommodative policy stance to keep inflation in check. Today’s announcement clearly indicates the end of easy monetary policy by RBI, the same reflected well on the 10-Year benchmark yield which hit a multi-year high. The unwinding of liquidity will create some turbulence, and the likely reason for RBI to lower the growth rate projection for FY23 to 7.2 per cent, inflation aim hiked to 5.7 per cent from 4.5 per cent earlier. The clear aim of the central banks worldwide is to control inflation, unwind easy liquidity and focus on slow and steady growth.”

• Adhil Shetty, CEO at BankBazaar.com said, “The Reserve Bank of India’s latest decision to maintain the status quo on the repo rate will keep homeowners happy for now. With no hikes in the repo rate, home loan rates will continue to be flat. Additionally, the central bank’s move to extend the rationalisation of housing loan risk weight and link them only to loan to value (LTV) ratios for home loans sanctioned up to March 31, 2023, may help keep lending costs cool. With lower provisioning required against home loans, banks will have more capital to lend out, which should contribute to keeping lending rates low. This remains a good time for prospective homeowners to take a home loan. There are at least 20 lenders now giving home loans at rates under 6.90 per cent to eligible borrowers. Even existing home loan borrowers may switch to lower interest rates to bring down their payments and increase long-term savings. Bear in mind that there are indicators that lending rates will rise. The 10-year bond yield is over 7 per cent now. Inflation has also hardened. If these trends continue, at some point, the central bank will have to hike rates.”

• Ravi Singh, Vice President and Head of Research at Share India Securities said, “RBI monetary policy has fallen much within the expectations of a dovish stance in view of the current crisis and maintains it’s pro-growth outlook. The geopolitical scenario on the global front and soaring inflation have led the RBI to lower its growth forecast to 7.2 per cent from 7.8 per cent and an increase in the inflation forecast for the current FY. However, the strong Indian forex reserves and a stable financial sector is providing some relief to the dismay. The unchanged repo rate will provide more elbow room to the homebuyers and helps in the revival of the realty sector. To curb the uncontrollable inflation, RBI has increased the reverse repo rate and sharp increase in the inflation projection has hinted towards a possible tightening in the near future.”

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