RBI Monetary Policy Live Updates: Looking At 4-4.3% Inflation By FY23 End

India's Monetary Policy Committee, at its fifth meeting of the year, decided to keep the repo rate unchanged at 4%. The committee also retained the accommodative stance, with a vote of 5-1. Committee member JR Varma has been voting for a change in stance for the last two meetings.

The reverse repo rate also stands unchanged at 3.35%.

Governor Shaktikanta Das said that continued policy support is required for a durable recovery.

The RBI continues to work on a CBDC. Work on a wholesale CBDC is further along compared to work on a retail CBDC, said deputy governor Rabi Sankar.

He added that the key challenges include security risks and fraud risks. The impact of a digital currency, which is the equivalent of paper currency, on consumer behaviour, the banking sector and currency in circulation will also need to be watched.

The output gap, which is the gap between potential output and realised output remains "very wide" and may take years to close, said deputy governor Michael Patra.

He added that a decline in core inflation is expected after November as fuel price adjustments feed into the data.

Commenting on credit growth, the RBI governor said that 7% credit growth is definitely low for an economy like India and it should go up. However, the flow of bank credit to the commercial sectors is improving.

Last year due to surplus liquidity conditions and low market borrowing rates, large and medium corporates have managed to raise money via bonds. This depressed bank credit to large corporates.

Bankers have expressed concerns over mispricing of risk in certain segments of the lending market. In particular, there are concerns over mispricing of loans to large corporates.

RBI deputy governor Rajeshwar Rao said that pricing of loans is dependent on the risk perception of banks. While easy liquidity will reduce the cost of funds for banks, a decision to price loans at a certain level is entirely dependent on individual banks.

When asked whether the Indian central bank is under-playing inflation at a time when globally, the view is turning away from "transitory inflation".

Das said that it is incorrect to compare India to global economies. In many of these countries, inflation is well above target. In India, inflation projections suggest that price pressures will peak in the fourth quarter of this year and then ease thereafter.

Deputy governor Patra said that the debate between "team transitory" and "team permanent" on inflation continues. The objective of monetary policy is to maintain a growth inflation balance in the medium term. The idea is not to "shoot from the holster."

Patra said the monetary policy report suggests that inflation will fall to 4-4.33% by FY23 end.

Commenting on whether the elevated core inflation is weighing on the central bank's mind, Das said that the MPC debated this and has recognised core inflation as a policy risk.

Standing Deposit Facility will be used when it is needed, says RBI Deputy Governor Michael Patra. At current time, RBI has several instruments at its arsenal and is using time-tested tools.

Patra added that since the SDF does not include any collateral, it is unclear how market participants will engage with the facility.

The first question thrown at the RBI Governor was what the central bank is looking for to judge whether the economic recovery is durable.

To this, Governor Das said that several key components like private investment and consumption are still below pre-pandemic levels. This needs to be carefully watched.

Globally, monetary policy is reaching an inflection point, said RBI Governor Das. Ensuring the domestic economy remains resilient will be important against this backdrop, he said.

"Managing a durable, strong and inclusive recovery is our mission," said Das. "We need to be patient, persevering and persistent in our efforts."

The Reserve Bank has stuck to its liquidity play book by saying that it will continue to use variable rate reverse repo operations to absorb funds. 14-VRRRs will remain the preferred duration to absorb liquidity although the amount for auction has been raised.

The RBI will conduct a VRRR auction of Rs 6.5 lakh crore in mid-December and Rs 7.5 lakh crore at the end of the month.

14-day VRRRs will continue to be complemented by longer term 28-day VRRR auctions.

The RBI has also said that banks will be given the option to pre-pay outstanding amount of funds availed under the targeted long term repo operations.

Support available to banks via the marginal standing facility will also be wound down. Banks will be able to dip-in to the extent of 2% of deposits to borrow from this window compared to 3% earlier. Given surplus liquidity conditions, this window is rarely used.

The RBI is projecting inflation at 5.3% for FY22, which included 5.1% in Q3 and 5.7% in Q4, with risks broadly balanced. Inflation is seen at 5% in Q1 and Q2 FY23.

A well entrenched nominal anchor has provided credibility and flexibility to monetary policy, said Das. It is important to keep inflation aligned with the target of 4 (+/-2)%, he added.

"Price stability remains cardinal principal of monetary policy," said Das, adding that a soft landing, that is well timed, is the objective of monetary policy.

The recovery that had been interrupted by the second wave is gaining traction. It is not yet self-sustaining and durable, said RBI Governor Das.

A recovery in aggregate demand hinges on private investment, which is still lagging. Given the continued slack in the economy, policy support is warranted, he added.

The central bank has retained its forecast for FY22 GDP growth at at 9.5%, which included 6.6% growth in Q3, 6% growth in Q4. Real GDP growth is projected at 17.2% for Q1 FY23 and at 7.8% for Q2 FY23.

India's Monetary Policy Committee concludes its fifth meeting of the financial year on Wednesday. The meeting comes against the backdrop of a recovering economy even though the spread of the Omicron variant of the Covid virus has added uncertainty to the outlook.

All 31 economists surveyed by Bloomberg expect the MPC to leave the repo rate unchanged at 4%. A majority had expected the reverse repo rate to be held steady at 3.35% as well.

While no one is arguing for a repo rate hike, some economists said it is time to raise the reverse repo rate, which, in times of surplus liquidity, becomes the de facto policy rate.

In normal times, the reverse repo rate is pegged at 25 basis points below the repo rate but the corridor is widened in times of uncertainty. With the worst of the uncertainty behind us, a small hike in the reverse repo rate is justified.

Such a hike could come either in December or the February meet.

"We expect the RBI to hike the reverse repo rate by 20 basis points in the December policy, followed by another 20 basis points in the February policy," said Kaushik Das, chief economist at Deutsche Bank. A move in the stance from accommodative to neutral is not likely before February, he said.

Sajjid Chinoy, chief India economist at JP Morgan, said while markets have priced in a hike in December, the RBI may first lay the groundwork for this.

"With the RBI repeatedly signaling that normalisation would be well-telegraphed, and no indication that reverse repo rates were about to go up, we had expected—even before the Omicron scare—the RBI would lay the groundwork for reverse repo hikes at this week’s review and then hike the reverse repo rate by 20 basis points each across the February and April reviews," Chinoy said.

Ahead of the policy review, Sonal Varma, chief India economist at Nomura, wrote that despite Omicron uncertainty, monetary policy makers should 'keep calm and carry on' with the process of normalisation.

Among the factors to consider is the fact that core CPI inflation has been sticky and headline inflation is likely to converge towards core inflation at around 6% by early-2022. You can read that analysis here.

Abheek Barua, chief economist at HDFC Bank, said the "passive" approach to normalisation taken by the central bank has meant that short-term rates have already risen. However, amid the Omicron uncertainty, the RBI may stay away from stronger steps towards liquidity normalisation, such as introducing a standing deposit facility window. You can read the detailed view here.

If it does delay liquidity normalisation, the central bank will have to stay watchful of emerging concerns over mispricing of risk, as reported by BQ's Vishwanath Nair.