RBI Monetary Policy: MPC retains repo rate, hikes reverse repo rate

Reserve Bank of India (RBI)

The Monetary Policy Committee (MPC) on Friday retained the key repo rate but announced change in the reverse repo rate by 40 bps to 3.75 percent.

This is the eleventh time in a row that the MPC has maintained maintained the status quo of repo rate.

Besides, the Reserve Bank of India (RBI) on Friday revised its GDP growth projection downwards for the current financial year to 7.2 per cent as compared with the 7.8 per cent, according to an earlier projection.

Tabling the MPC’s first bi-monthly monetary policy statement for the financial year 2022-23, RBI Governor said, “The real GDP growth for 2022-23 is now projected at 7.2 per cent with Q1:2022-23 at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4.0 per cent, assuming crude oil (Indian basket) at US$ 100 per barrel during 2022-23.”

Experts opinion on the announcements:

Dewang Neralla, Chief Executive Officer, NTT DATA Payment Services India Limited

The proposed interoperability of card-less cash withdrawal through ATMs is a great step taken by RBI and facilitated through the use of Unified Payments Interface which will not only lead to ease of transaction but also aid in containing frauds like skimming and card cloning. This provides a whole new level of ease of transactions across the banking system which adds to the bouquet of digital transaction services for the economy. Furthermore, RBI has taken concrete steps to increase penetration of BBPS payment collection for merchants. The RBI has proposed reduction of net worth criteria for Non-Banking operating units from Rs 100 crore to Rs 25 crore. This move will further boost a large number of new players to enter the BBPS ecosystem and will thus increase the BBPS network in the country.

Also Read: Budget 2022: RBI to launch digital rupee, industry leaders welcome the move

Venkatraman Venkateswaran, Group President & CFO, Federal Bank

The MPC decided to continue with the “accommodative” stance in the backdrop of elevated level of inflation and heightening geo-political tensions. They reiterated a gradual, calibrated withdrawal of liquidity in a non-disruptive manner.

Growth is projected to be lower (7.2%) and inflation higher (5.7%) as compared to February outlook. The current outlook assumes crude oil price at $100/barrel.

RBI has restored the Liquidity Adjustment Facility (LAF) to 50 bps, which is an indication of moving away from loose monetary policy. They have introduced Standing Deposit Facility (SDF) which will form the floor of the LAF corridor.

In summary, RBI continues to prioritize growth and has recognized the threat of heightened inflation.

Atanu Kumar Das, MD & CEO, Bank of India

Policy continues to have a ‘feel good’ stance from the point of view of durable recovery process. The projected numbers perhaps warrant more frequent revisits in the face of dynamically evolving operative environment, within and outside India.

Indranil Pan – Chief Economist, YES BANK

Amidst the ‘tectonic’ shifts in global conditions, RBI has taken more than one step towards preparing the market for an eventual increase in the repo rate. This position is made clear as the governor indicated that the order of preference for RBI now is inflation, growth and financial stability, rather than the post COVID-19 preference of preserving and supporting growth momentum. The process of neutralizing monetary policy had already started with withdrawal of ultra-comfortable liquidity. In this policy, the operative rate was increased by 40bps with the institutionalization of the Standing Deposit Facility. With this, RBI has almost buried the reverse repo as an instrument. Towards the objective of an orderly completion of the government’s borrowings, the HTM limit was increased by 1% to 23%. Overall, we now expect the stance to be made ‘NEUTRAL’ in June and the first repo rate increase can come through in August.

Also Read: RBI Monetary Policy: MPC retains repo rate, hikes reverse repo rate

Prasenjit K. Basu, Chief Economist, ICICI Securities

The MPC sensibly decided to keep monetary policy accommodative despite inflation being marginally above its tolerance band. Two good reasons justify the policy: (a) inflation is high partly because of (external) supply shocks, so reducing aggregate demand (through monetary tightening) will not address the issue; (b) there is a considerable output gap, with the economy having contracted 6.6% in FY21, and estimated to have grown 8.9% in FY22 (far from closing the gap, in an economy with potential growth of 7% annually). Staying accommodative is thus the right approach: loan growth needs to accelerate to enable a rebound in domestic demand, but the RBI will also withdraw accommodation tactically if inflation gets too far from the target.

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