RBI Monetary Policy Highlights: Tilted Towards Growth ... Still

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, despite widespread expectations that the central bank would raise this rate, which is seen as the effective policy rate in times of surplus liquidity.

At the current juncture, when monetary policy stance continues to be accommodative, there is no reason to make any changes or tamper with rates, RBI Governor Shaktikanta Das said in a media interaction post the policy announcement.

The MPC maintained an accommodative stance and projected real GDP growth at 7.8% in FY23 with inflation seen at 4.5%. Both the growth and inflation expectations are at the lower end of economists' expectations.

Economists were divided over the central bank's decision.

The RBI policy, yet again, put clear emphasis on ensuring that the economy is on a path of durable growth recovery, Abheek Barua, chief economist at HDFC Bank Ltd., said. It showed a clear tilt towards growth while taking a view that inflation, while elevated, is driven by supply disruptions rather than entrenched demand-side pressures, he said. Also, projections show that inflation is on a downward trajectory.

This was the first policy of the calendar year and perhaps sets the tone for the rest of the year, said Barua. If that is indeed the case, the RBI is likely to follow a gentle approach to normalisation and withdrawal of monetary support, unlike western central banks, he said.

The policy has been far more dovish than expectations, decoupling completely from the global financial tightening, said Upasna Bhardwaj, senior Economist at Kotak Mahindra Bank.

We expect the RBI to play catch-up in the April policy, said Bhardwaj, adding that the RBI may use the variable rate reverse repo auctions to bring overnight rates closer to repo rate even before the fixed reverse repo hike.

Behind The Curve?

The RBI highlighted uncertainties around future pandemic waves, said Pranjul Bhandari, chief economist at HSBC. "We, on the other hand, believe that it is becoming increasingly clear that the direct economic cost of successive waves is falling as vaccination rates are rising and the economy is adapting to living with the pandemic." As such, the excess accommodation provided at the peak of the pandemic needs to be reined in, she added.

Bhandari also said that inflation pressures are higher than the RBI is estimating. As such, we think the RBI should start normalising rates quickly, she said. HSBC expects a 40 basis points hike in the reverse repo rate in the MPC's next meeting in April. Increasing the reverse repo policy rate will narrow the corridor and lower the volatility in short term rates, Bhandari said.

While uncertainty about the inflation trajectory in the coming months cannot be ignored, the central bank seems clearly in favour of following an extremely calibrated and nuanced pace of normalisation of monetary policy and withdrawing the crisis-time support, even if that means erring on the side of caution, said Siddhartha Sanyal, chief economist and head of research at Bandhan Bank Ltd.

The RBI was more proactive in providing large quantum of liquidity to support the economy during 2020 and 2021 rather than cutting rates aggressively, he said. Thus, it is not surprising that the central bank is now prioritising unwinding of surplus liquidity over rate action, he said.

The perfect V-day gift to bond markets was delivered on P-day today, said Lakshmi Iyer, CIO for Debt at the Kotak Mahindra Asset Management Company. "No change in rates or stance is a big boost to sagging bond prices and a much needed respite."

(There are) no major worries on inflation front as well. The FY23 inflation forecasts at 4.5% also seem absolutely fine for yields, she said. Expect the positive sentiment to revive in bond markets in near term.