RBI Monetary Policy Highlights: RBI Holds Its Fire To Support Durable, Strong, Inclusive Recovery
The MPC concluded its fifth review of the financial year on Wednesday.
India's six-member Monetary Policy Committee voted to keep the benchmark repo and reverse repo rates unchanged as it weighed uncertainty brought on by the Omicron variant of the Covid virus against rising input cost pressures.
Following the review:
The repo rate stands unchanged at 4%.
The monetary policy stance remained accommodative. Five members voted in favour of the stance with Jayanth R Varma once again voting against.
The reverse repo rate remains unchanged at 3.35%.
All the 31 economists surveyed by Bloomberg expected the MPC to leave the repo rate unchanged at 4%. A majority had expected the reverse repo rate to be held steady as well.
The MPC, in its resolution, said it was considered appropriate to wait for growth signals to become solidly entrenched while remaining watchful on inflation dynamics.
[MPC decided to] continue with an accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target.MPC Resolution
A Dovish Note
In his accompanying statement, Governor Das, too, struck a dovish note. While he emphasised that price stability remains the "cardinal principle" for monetary policy, much of his commentary focused on the need to support growth.
"Managing a durable, strong and inclusive recovery is our mission," said Das, while stressing the need to be persevering and persistent in these efforts.
We need to be persevering, patient and persistent in our efforts. We also need to be aware, alert and agile to the new realities confronting us. Our efforts over the past one year and nine months have given us the confidence and a head-start to face the challenges that lie ahead.Shaktikanta Das, Governor, RBI
Growth Outlook
The Indian economy grew 20.1% in the first quarter of the current financial year and 8.4% in the second.
Recovery interrupted by the second wave of the pandemic is gaining traction but is not yet strong enough to be self-sustaining and durable. The recovery in domestic economic activity is turning increasingly broad-based, with the expanding vaccination coverage, slump in fresh Covid-19 cases and rapid normalisation of mobility.
The spurt in contact-intensive activities and pent-up demand will continue to bolster urban demand.
The government’s infrastructure push, widening of the performance-linked incentive scheme, structural reforms, recovering capacity utilisation and benign liquidity and financial conditions provide conducive conditions for private investment demand.
Volatile commodity prices, persisting global supply disruptions, new mutations of the virus and financial market volatility pose downside risks to the outlook.
Taking all these factors into consideration and assuming no resurgence in Covid-19 infections in India, the projection for real GDP growth is retained at 9.5% in FY22 consisting of 6.6% in Q3; and 6% in Q4FY22. Real GDP growth is projected at 17.2% for Q1FY23 and at 7.8% for Q2FY23.MPC Resolution
Inflation Outlook
Inflation, while currently within India's comfort zone of 4 (+/-2)%, is expected to inch higher as a positive base effect wanes. Persistence of high core inflation since June 2020 is an area of policy concern, Das said.
The flare-up in vegetables prices due to heavy rains in October and November is likely to reverse with the winter arrivals.
Rabi sowing is progressing well and is set to exceed last year’s acreage.
Recent supply side interventions by the government continue to restrain the pass-through of elevated international edible oil prices to domestic retail inflation. Crude prices, too, have corrected.
Cost-push pressures from high industrial raw material prices, transportation costs, and global logistics and supply chain bottlenecks continue to impinge on core inflation.
However, the slack in the economy is muting the pass-through of rising input costs to output prices. Input cost pressures could rapidly be transmitted into retail inflation as demand strengthens, Das said. As such, inflation will peak in Q4 FY22 and soften thereafter.
For a sustained lowering of core inflation, continuing the normalisation of excise duties and VATs, alongside measures to address other input cost pressures assume critical importance, more so as demand improves.
Taking into consideration all these factors, CPI inflation is projected at 5.3% for FY22; 5.1% in Q3; 5.7% in Q4FY22, with risks broadly balanced. CPI inflation for Q1 and Q2 FY23 is projected at 5%.MPC Resolution
Liquidity Policy
The RBI will continue to manage liquidity in a way that is conducive to entrenching the recovery, fostering macro-economic and financial stability, Das said.
The central bank will continue to use variable rate reverse repo operations to absorb funds. 14-day VRRRs will remain the preferred duration to absorb liquidity although the amount for auction has been raised.
14-day VRRRs will be complemented by longer-term 28-day VRRR auctions as needed. The RBI also said banks would be given the option to pre-pay outstanding amount of funds availed under the targeted long-term repo operations.