RBI keeps repo rate unchanged, but signals tighter policy ahead
The Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) kept the repo rate unchanged and stance accommodative in today’s meeting. However, it signalled at a gradual tightening in coming months, and restored the policy rate corridor under the liquidity adjustment facility (LAF) to the pre-pandemic position. The RBI seems to be preparing markets for repo rate hikes and tighter monetary policy conditions in coming months as external risks and inflationary pressures mount.
The RBI signalled its shifting focus from reviving growth to mitigating inflation risks. Upside risks to inflation show no signs of abating, with crude oil prices persisting above $100 per barrel, and food and metal prices at historic highs. Along with increasing cost pressures, we expect pressure on consumer prices to increase this fiscal. The RBI will also need to mitigate spill-overs from tightening global financial conditions, driven by the US Federal Reserve’s (Fed) rate hikes and geopolitical tensions. Due to these factors, we expect the RBI to raise repo rate by 50-75 basis points (bps) in fiscal 2023, beginning with the June monetary policy review.
Highlights of the April MPC meeting
The MPC voted unanimously to keep the repo rate unchanged at 4%
While the reverse repo rate was maintained at 3.35%, it will be replaced by a new standing deposit facility (SDF) rate as the floor of the policy corridor under the LAF. The marginal standing facility (MSF) rate will remain at the upper end of the policy corridor. The SDF rate will permit liquidity absorption by the RBI without collateral and will be effective in sucking liquidity compared with the reverse repo rate
The LAF policy corridor was restored to the pre-pandemic width of 50 bps. Accordingly, with the repo rate at 4%, the SDF and MSF rates stand at 3.75% and 4.25%, respectively
While the MPC voted unanimously to retain its accommodative stance, it will now focus on “withdrawal of accommodation to ensure inflation remains within target going forward, while supporting growth”
The MPC raised its forecast for consumer price index-linked (CPI) inflation to 5.7% for fiscal 2023 from 4.5% projected in February
Projection for gross domestic product (GDP) growth was lowered to 7.2% from 7.8% for this fiscal
The RBI intends to gradually withdraw the liquidity overhang of ~Rs 8.5 lakh crore persisting because of extraordinary liquidity easing measures undertaken post-pandemic
The limit for statutory liquidity ratio (SLR) securities under held-to-maturity (HTM) was increased to 23% from 22% of net demand and time liabilities (NDTL)
