RBI Monetary Policy Highlights: Repo Rate Unchanged But Focus Shifts To Inflation Control

India's six-member Monetary Policy Committee voted to keep the repo rate unchanged as Russia's invasion of Ukraine added to a rise in inflation but also increased the downside to growth.

The MPC maintained an accommodative stance while focusing on withdrawal of accommodation to ensure that inflation remains within the target while supporting growth.

Alongside the shift in the wording of its guidance, the RBI has tweaked the liquidity management framework, introducing the standing deposit facility as the lower end of the interest rate corridor.

Following the review:

• The repo rate stands unchanged at 4%.

• The standing deposit facility will be offered at a rate of 3.75%; 25 basis points below the repo rate.

• The marginal standing facility will be offered at a rate of 4.25%; 25 basis points above the repo rate.

• The fixed rate reverse repo window remains part of the RBI's toolkit and that rate has been maintained at 3.35%.

CPI inflation stood at 6.07% in February compared with 6.01% in January—exceeding the MPC's target range of 4(+/-2)% for the second straight month.

Looking ahead, the inflation trajectory will depend critically upon the evolving geopolitical situation and its impact on global commodity prices and logistics, the resolution by the MPC stated.

• Elevated global price pressures in key food items such as edible oils, and in animal and poultry feed due to global supply shortages impart high uncertainty to the food price outlook, warranting continuous monitoring.

• In this scenario, pro-active supply management is critical to contain inflation.

• International crude oil prices remain volatile and elevated, with considerable uncertainties surrounding global supplies. With the broad-based surge in prices of key industrial inputs and global supply chain disruptions, input cost push pressures appear likely to persist for longer than expected earlier.

• Their pass-through to retail prices, though limited till now given the continuing slack in the economy, needs to be monitored carefully.

The break-up of projected inflation is as follows:

• Q1 inflation at 6.3

• Q2 inflation at 5%

• Q3 inflation at 5.4%

• Q4 inflation at 5.1% for FY23

• Good prospects of rabi output augur well for rural demand. With the ebbing of the third wave and expanding vaccination coverage, the pick-up in contact-intensive services and urban demand is expected to be sustained.

• The government’s thrust on capital expenditure coupled with initiatives such as the production-linked incentive or PLI scheme should bolster private investment activity, amid improving capacity utilisation, deleveraged corporate balance sheets, higher offtake of bank credit and congenial financial conditions.

• At the same time, the escalation of the geopolitical situation and the accompanying surge in international crude oil and other commodity prices, tightening of global financial conditions, persistence of supply-side disruptions and significantly weaker external demand pose downside risks to the outlook.

• The future course of the pandemic and the uncertainties about the pace of monetary policy normalisation in major advanced economies also weigh on the outlook.

The break-up is as follows:

• Q1 at 16.2%

• Q2 at 6.2%

• Q3 at 4.1%

• Q4 at 4% for FY23

This is assuming crude oil at $100 per barrel in FY23.

"The MPC is of the view that since the February meeting, the ratcheting up of geopolitical tensions, generalised hardening of global commodity prices, the likelihood of prolonged supply-chain disruptions, dislocations in trade and capital flows, divergent monetary policy responses and volatility in global financial markets are imparting sizeable upside risks to the inflation trajectory and downside risks to domestic growth," the resolution said.

Liquidity Conditions

Both ends of LAF corridor will have standing facilities, one to absorb liquidity and the other to inject liquidity, depending on the evolving financial market conditions, Das said.

• The SDF rate will be 25 bps lower than policy rate, to absorb liquidity.

• The MSF rate will continue to be 25 bps above the repo rate, to inject liquidity.

This means that the liquidity adjustment facility corridor is restored to 50 basis points, the position that prevailed before the pandemic.

The move should not come as a surprise, having prepared the market for normalisation of the LAF corridor over the last several months, Das said.

"The RBI will engage in a gradual and calibrated withdrawal of this liquidity over a multi-year time frame in a non-disruptive manner beginning this year. The objective is to restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of monetary policy," Das said. "While doing so, I would like to reiterate our commitment to ensure the availability of adequate liquidity to meet the productive requirements of the economy."

"We also remain focused on completion of the borrowing programme of the government and towards this end the RBI will deploy various instruments as warranted," he said.