RBI Monetary Policy Highlights: Repo, Reverse Repo Rates Left Unchanged, Stance Stays Accommodative

India's six-member Monetary Policy Committee voted to keep the repo rate unchanged. The Reserve Bank of India also maintained a status quo on the reverse repo rate.

Growth Outlook

Data released by the National Statistical Office pegged GDP growth at 9.2% year-on-year for FY22.

• Recovery in domestic economic activity is yet to become broad-based as private consumption and contact-intensive services remain below pre-pandemic levels.

• The outlook for the Rabi crop bodes well for agriculture and rural demand.

• The impact of the ongoing third wave of the pandemic on the recovery is likely to be limited relative to the earlier waves, improving the outlook for contact-intensive services and urban demand.

• The announcements in the Union Budget for FY23 on boosting public infrastructure through enhanced capex are expected to augment growth and crowd in private investment.

Global financial market volatility, elevated international commodity prices, especially crude oil, and continuing global supply-side disruptions, pose downside risks to the outlook.

This includes:

• Q1 at 17.2%

• Q2 at 7%

• Q3 at 4.3%

• Q4 at 4.5% for FY23

Inflation Outlook

CPI inflation stood at 5.6% in December compared with 4.9% in November—within the MPC's target range of 4(+/-2)%. Headline inflation is expected to peak in the current quarter. It is likely to moderate in the first half of FY23 and move closer to the target rate thereafter, providing room for monetary policy to remain accommodative.

The potential rise in input costs is a contingent risk, especially if international crude oil prices remain elevated.

• Vegetables prices are expected to ease further on fresh winter crop arrivals, while pulses and edible oil prices are likely to continue to ease in response to strong supply-side interventions by the government and increase in domestic production.

• Prospects of a good Rabi harvest add to the optimism on the food price front. An adverse base effect, however, is likely to prevent a substantial easing of food inflation in January.

• While cost-push pressures on core inflation may continue in the near term, the Reserve Bank surveys point to some softening in the pace of increase in selling prices.

The break-up of projected inflation for the next fiscal year is as follows:

• Q1 at 4.9%

• Q2 at 5%

• Q3 at 4%

• Q4 at 4.2% for FY23

With financial market conditions normalising, the RBI has moved towards a liquidity framework it intended to implement before the pandemic hit.

• Henceforth, variable rate repo and variable rate reverse repo auctions of 14-day tenor will operate as the main liquidity management tool.

• With effect from March 1, fixed rate reverse repo and MSF operations will be available between 5:30 p.m. till 11:59 p.m. on all days.

The RBI said that it will continue to conduct variable rate repo and reverse repo auctions alongside each other to manage liquidity conditions.Policy actions of the RBI have yielded desired results and it has now turned to rebalancing liquidity on a dynamic basis, Das said.

While the RBI did not announce any direct support for government bonds amid a record borrowing programme, "it is expected that market participants will engage responsibly", Das said.

In the post-policy media interaction, Das said the RBI's actions will indicate what level of bond yields it is comfortable with. The central bank, which is also the debt manager to the government, will manage the government borrowing programme in a non-disruptive manner, he added.

According to Das, the record high government borrowing programme will be partly balanced out by lower borrowings by public sector entities like NHAI. Also, an increase in the limit for inflows via the voluntary retention route for foreign debt investments, could support the larger borrowings, Das said.