RBI maintains status quo on interest rates, revises inflation upwards

The Reserve Bank of India veered further away from the central banks of the Western world as it retained status quo on interest rates and kept the monetary stance accommodative to beat a possible slowdown in economic activity in a `dynamic’ and `fast changing’ world and said would focus on withdrawal of the accommodative stance.

Citing price pressures the central bank bumped up inflation forecasts and cut growth forecasts, but said it would have a `nimble footed’ approach to liquidity as it introduced the Standing Deposit Facility to manage the excess in the system.

It narrowed the corridor of the Liquidity Adjustment Facility, fixing the SDF rate at 3.75 percent with the repo rate to 50 basis points.

The Monetary Policy Committee raised the inflation forecast for the fiscal year to 5.7 percent, from 4.5 percent citing rising commodity prices and a spill over into manufactured products but said the key food products may be moderate due to fresh crop arrivals. Economic growth forecast has been cut to 7.2 percent, from 7.8 percent as supply disruptions lessen output and high prices destroy demand.

``Our commitment to ensure adequate liquidity to meet the productive requirements of the economy,’’ said Das. The RBI will deploy all instruments to ensure government borrowing and financial stability, he said. The growth and inflation forecasts are `fraught’ with risks and are done with an assumption of Crude oil at $100 a barrel.

Repo rate is kept at 4 percent and the reverse repo rate is now at 3.5 percent. Investors cheered the decision with the Sensex gaining soon after the decision, but gave up gains as commentary on inflation and growth were seen as adverse to corporate earnings.

Governor Shaktikanta Das has been stubbornly pro-growth and argued against raising borrowing costs even as central bankers from Federal Reserve’s Jerome Powell to European Central Bank’s Christine Lagarde began talking about the need to tighten monetary policy in the light of price pressures that are at a four- decade high.

Economic conditions in India warrant a different monetary policy approach as the rates were not zero bound unlike in the West which left a lot of room for them to catch up when they were caught by price pressure unawares, Governor Das had argued. Real rates in India haven’t been as negative as it was in the West to lift rates to make market rates relevant. The Federal Reserve after raising target rate by a quarter point, is signalling doubling the increases and bond purchases runoff.

An ET poll of 21 market participants forecast RBI to keep its policy stance and key rates unchanged as its declared aim was to ensure a durable economic recovery.

But price pressure remains a big threat. Brent crude oil prices surged to nearly $140 per barrel, the highest since 2008, in the immediate aftermath of the Russian invasion, changing the fiscal math for large oil importers such as India. However, crude prices are now off the boil since the US announced tapping into its strategic reserves to cool prices.

Indian companies are expected to report a strong sales growth but their profit margins are set to be squeezed. Many manufacturers including the likes of Maruti Suzuki and Nestle have raised product prices.

The government has permitted fuel prices to rise after holding them for months to see state elections through. Pump prices of diesel, petrol and compressed natural gas are beginning to bite the consumer. This could have a cascading effect on the general price level with logistics costs going through the roof.

But Governor Das is focused on reviving investment demand and said that economic activity that shrank due to Covid is yet to recover fully.