RBI Monetary Policy: Repo fee unchanged at 4% for the eleventh consecutive time

RBI Monetary Policy 2022: The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) stored the repo fee unchanged at 4 per cent for the eleventh consecutive time whereas sustaining an ‘accommodative stance’, RBI Governor Shaktikanta Das introduced on Friday.

The central financial institution governor stated that the MPC had voted unanimously to keep up the accommodative stance and added that the reverse repo fee too was stored unchanged at 3.35 per cent.

The Marginal Standing Facility (MSF) fee and financial institution fee additionally had been stored unchanged at 4.25 p.c.

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

Addressing the media after the financial coverage assembly, Das stated that RBI will restore the liquidity adjustment facility (LAF) hall to 50 bps, because it was pre-Covid. MSF Rate and financial institution fee stays 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 stated.

Speaking on the central financial institution’s stance, he stated “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 in regards to the reverse repo, Das stated 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 expansion projection for the present fiscal to 7.2 per cent from 7.8 per cent earlier; whereas elevating the inflation forecast to five.7 per cent from 4.5 per cent.

Speaking on the GDP, Das stated the actual GDP progress 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 This autumn at 4.0 per cent, assuming crude oil (Indian basket) at US$ 100 per barrel throughout 2022-23.

On the inflation fee forecast, Shaktikanta Das stated 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 This autumn at 5.1 per cent.

He added that given the extreme volatility in world crude oil costs since late February and the intense uncertainty over the evolving geopolitical tensions, any projection of progress and inflation is fraught with danger, and is essentially contingent upon future oil and commodity worth developments.

In his speech, Das touched upon the liquidity and monetary market circumstances and stated the RBI will proceed to undertake a nuanced and nimble-footed method to liquidity administration whereas sustaining satisfactory liquidity within 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 stated.

How economists and market specialists reacted:
Dhiraj Relli, MD & CEO at HDFC Securities stated “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 Ok Vijayakumar, Chief Investment Strategist at Geojit Financial Services stated “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”