RBI keeps policy rates unchanged, takes more steps to mop up liquidity
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept the policy rates and accommodative stance unchanged at its review meeting today. However, as in the previous meeting, it took steps to reduce the extraordinary liquidity injected post the pandemic. The central bank remains supportive of growth, but is trying to manage challenges emerging from inflationary pressures and external risks — including a new unknown in the form of the omicron variant of Covid-19.
The RBI is proceeding cautiously in unwinding the unconventional easing measures, because economic recovery, while steady, remains incomplete, and faces unknown risks from the omicron variant. However, the RBI may not have the leeway to remain as accommodative in the coming months given that the pressure on inflation remains significant. To boot, the Federal Reserve of the United States is also withdrawing accommodation earlier than previously anticipated. We expect a hike in reverse repo rate in February 2022 to narrow the corridor with the repo rate to 25 basis points (bps). This is likely to be followed by a 25 bps hike in repo rate in March 2022.
Key takeaways from the December monetary policy review meeting
The MPC voted unanimously to keep the repo rate unchanged at 4%. Status quo was also maintained on the reverse repo rate at 3.35% and the marginal standing facility at 4.25%
It voted 5-1 to continue the accommodative stance
The MPC maintained forecasts for gross domestic product (GDP) growth at 9.5%, and consumer price index (CPI)-based inflation forecast at 5.3% for this fiscal
It announced further increase in liquidity absorption under 14-day VRRRs, Rs 6 lakh crore at present to Rs. 7.5 lakh crore by the end of this month. These will be complemented with longer-term VRRRs as well
An option was provided to banks to pre-pay the funds availed of under the Targeted Long-Term Repo Operations (TLTROs) announced in March-April 2020
Funding availability under the Marginal Standing Facility (MSF) was reduced to 2% of Net Demand and Time Liabilities (NDTL) from 3%
