The Reserve Bank of India (RBI) on Friday raised its inflation outlook to reflect costlier oil while leaving borrowing costs unchanged after a three-day meeting of the Monetary Policy Committee in Mumbai.
In its first monetary policy announcement of 2022-23, the RBI projected inflation to be at 5.7 per cent this financial year, compared to 4.5 per cent in 2021-22. RBI Governor Shaktikanta Das said in a statement on Friday. The committee held the lending rate, or the repo rate, at 4 per cent. The reverse repo rate, or the key borrowing rate, was also kept unchanged at 3.35 per cent.
The central bank revised its real GDP growth projection for 2022-23 to 7.2 per cent, compared to its earlier guidance of 7.8 per cent,.
Inflation has held above the RBI's 6 per cent upper threshold so far this year, casting doubts on its current strategy of keeping rates low to bolster growth, even as some central banks are already raising borrowing costs in this cycle.
The committee’s decisions are in line with a Business Standard poll of 10 experts conducted earlier this week.
Das said the global economy is seeing “tectonic shifts” from the war and extreme volatility in commodity and financial markets. “Caught in the cross current of multiple headwinds, our approach needs to be cautious but proactive in mitigating the adverse impact on India’s growth, inflation and financial conditions,” he said.
The RBI said it would restore the width of the liquidity adjustment facility to 50 basis points, which was seen as a first step to move away from the ultra loose monetary policy embraced during the Covid-19 pandemic. Das said it will engage in a gradual withdrawal of liquidity over a multi-year timeframe beginning this year. Das said economic activity is barely above pre-pandemic levels but continues to steadily recover.
When the pandemic broke out in 2020, the RBI was proactive with a back-to-back reduction in the repo rate by 115 basis points in total. It has been maintaining an ultra-loose policy since the pandemic started though some of the liquidity measures have been rolled back in the last financial year as growth recovered from the lows of 2020-21. The central bank has said the accommodative stance of the policy will be maintained until growth recovery becomes sustainable. It has not changed the repo rate since the May policy review meeting of 2020.
However, inflation concerns have resurfaced now following the sharp rise in fuel prices in the past two weeks. The fuel price hike became necessary after global crude oil prices surged past $100/bbl for the first time since 2014, following the Russian invasion of Ukraine in late February.
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