RBI cuts growth outlook, interest rate unchanged

Mumbai: Despite inflation edging higher in the aftermath of the Russia-Ukraine war and the surging oil prices, the Monetary Policy Committee (MPC) of the Reserve Bank of India once again decided to keep the rates unchanged in its first bi-monetary policy of the current fiscal.  However, the six member rate setting panel sounded more hawkish and signalled a calibrated removal of accommodation in this fiscal going forward.
 
The RBI lowered its economic growth projection by 60 basis points to 7.2 per cent and increased its retail CPI inflation projection by 120 basis points to 5.7 per cent for the year FY23, by raising the underlying crude oil price expectation by a sharp $25 per barrel.
  This is the eleventh consecutive time the RBI maintained status quo amidst the current uncertainties and the sharp rise in in inflation in the global economy.
 
In his post-policy press conference, RBI governor Shaktikanta Das said the central bank will now gradually move away from accommodation and prioritise ‘inflation’ before growth after a gap of three years. Economists expect the central bank to hike rates in the August policy meet. Market interest rates will start increasing at a faster pace now which is positive for savers, especially the depositors.

“Inflation is now projected to be higher and growth lower than the assessment in February. Economic activity, although recovering, is barely above its pre-pandemic level. Against this backdrop, the MPC decided to retain the repo rate at 4 per cent. 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,” said Das in his statement.

“As the horizon was brightening up, escalating geopolitical tensions have cast a shadow on our economic outlook. Although India’s direct trade exposure to countries at the epicentre of the conflict is limited, the war could potentially impede the economic recovery through elevated commodity prices and global spillover channels.

Further, financial market volatility induced by monetary policy normalisation in advanced economies, renewed Covid-19 infections in some major countries with augmented supply-side disruptions and protracted shortages of critical inputs, such as semi-conductors and chips, pose downside risks to the outlook,” added Das.

To manage excess liquidity in the market, which has an overhang of Rs 8.5 lakh crore, the RBI said it will, in a gradual and calibrated manner, withdraw this liquidity overhang from the system beginning this year, over a multi-year time frame in a non-disruptive manner.

The excess liquidity of about Rs 5 lakh crore provided by the central bank during the pandemic has already been withdrawn or returned on the lapse of various facilities like VRRR (variable rate reverse repo), VRR (variable rate repo) auctions. To manage liquidity, the RBI announced normalisation of the LAF (liquidity adjustment facility) corridor to pre-pandemic levels at 50 basis points, and introduced the standing deposit facility, or SDF, at 3.75 per cent (25 basis points below the repo rate). The marginal standing facility will be offered at a rate 4.25 per cent, 25 basis points above the repo rate. The central bank also increased the held-to-maturity (HTM) for banks from 22 per cent to 23 per cent till March 2023 to support the government borrowing programme.

In a bid to put more money in the hands of home financiers and boost retail home loans, the RBI extended the housing loans risk weight guidelines for another year.

“With upside risks to 2QFY23 inflation projection, the first repo rate hike might be delivered in August and thereafter towards the end of 2022,” said Radhika Rao, senior economist at DBS Group.