Staying accommodative: Growth is RBI’s top priority

Staying accommodative: Growth is RBI’s top priority

In a surprising move, Reserve Bank of India (RBI) on Thursday left policy rates untouched and retained its accommodative stance to support the nascent and uneven recovery. The central bank forecast inflation in 2022-23 at just 4.5% and projected the economy would grow at a subdued 7.8%, well below the 8-8.5% estimated in the Economic Survey.

Governor Shaktikanta Das observed that taking into account the comfort provided from the improving inflation outlook and the uncertainties related to Omicron and global spillovers, continued policy support was warranted for a durable and broad-based recovery. “There has been some loss in momentum seen in the high frequency data,” the governor observed.

The forecast pencils in only a 4.3% and 4.5% GDP growth in Q3 and Q3FY23 respectively. The relatively low inflation projection and the dovish stance cheered the bond markets, which had anticipated a 15-20 basis point hike in the reverse repo rate. The yield on the benchmark came off by 8 bps to 6.74%.

Das asserted all scenarios — including global crude oil prices — had been taken into consideration while projecting inflation, which is expected to taper down to 4% by December 2022. He noted that as risks from the Omicron wave fade and supply chain pressures moderate, core inflation could soften. 

Explaining the RBI’s approach in decoupling from central banks that are tightening policy by raising rates, deputy governor Michael Patra explained the character of inflation in those economies was very different from that in India.

The central bank did not specifically comment on how it would manage the large government borrowing programme which had spooked the markets, sending the yield up all the way to 6.95% after the Union Budget; the Centre alone plans to borrow a net Rs 11.2 lakh crore in 2022-23. However, RBI governor Shaktikanta Das hinted the borrowings may be somewhat smaller than budgeted for and spoke of measures, like a bigger portfolio for foreign investors, that could ease the pressure on the markets. Das asserted the borrowings would take place in a non-disruptive manner and any measures needed would be initiated.

Experts believe the RBI’s inflation projections are somewhat optimistic. Pranjul Bhandari, chief economist India HSBC, said the inflation risks are much higher than the levels being estimated and therefore, expects both reverse repo and repo rate hikes in the rest of 2022, alongside explicit support to the government’s large borrowing plan.

Economists at Crisil foresee three hikes in the repo rate next year starting in April. Governor Das observed that the effective reverse repo rate — the weighted average rate of the fixed rate reverse repo and the VRRRs of longer maturity – had  increased from 3.37% at end-August 2021 to 3.87% on February 4, 2022. This reflected the migration of surplus liquidity from the overnight window to longer tenors.

Check the source here –Source, Financial Express.