Citing price pressures, the central bank raised the inflation forecast and cut the growth forecast, but said it would take an “agile” approach to liquidity by introducing the permanent deposit facility to manage the excess in the system.
It narrowed the Liquidity Adjustment Facility corridor, fixing the SDF rate at 3.75% with the repo rate at 50 basis points.
The Monetary Policy Committee raised inflation forecast for the year to 5.7% from 4.5%, citing rising commodity prices and a spillover into manufactured goods, but said the main food could be subdued due to the arrival of new crops. Economic growth forecasts have been cut to 7.2% from 7.8% as supply disruptions reduce production and high prices destroy demand.
“Our commitment to ensuring adequate liquidity to meet the productive needs of the economy,” Das said. The RBI will deploy all instruments to ensure public borrowing and financial stability, he said. Growth and inflation forecasts are “fraught” with risk and are made assuming crude oil at $100 a barrel.
The repo rate is maintained at 4% and the reverse repo rate is now at 3.5%. Investors cheered the decision with the Sensex gaining shortly after the decision, but gave up the gains as comments on inflation and growth were seen as adverse to corporate earnings.
Governor Shaktikanta Das has been stubbornly pro-growth and opposed to rising borrowing costs even as central bankers, from the Federal Reserve’s Jerome Powell to the European Central Bank’s Christine Lagarde, have begun to talk about the need to tighten monetary policy in light of price pressures that are at four-decade high.
Economic conditions in India warrant a different monetary policy approach, as rates were not tied to zero unlike in the West, giving them plenty of room to catch up when caught off guard by pressure. prices, Governor Das argued. Real rates in India have not been as negative as they were in the West to raise rates to make market rates relevant. The Federal Reserve, after raising the target rate by a quarter point, signals a doubling in increases and a trickle in bond purchases.
An ET poll of 21 market participants predicted that RBI would keep policy and key rates unchanged, with its stated aim of ensuring a sustainable economic recovery.
But price pressure remains a big threat. Brent crude oil prices jumped to nearly $140 a barrel, the highest since 2008, in the aftermath of the Russian invasion, changing the tax calculations for major oil importers such as India. However, crude prices are no longer boiling since the United States announced that it was tapping into its strategic reserves to cool prices.
Indian companies are expected to see strong sales growth, but their profit margins are expected to be reduced. Many manufacturers, including Maruti Suzuki and Nestlé, have raised product prices.
The government has allowed fuel prices to rise after withholding them for months to complete national elections. Pump prices for diesel, gasoline and compressed natural gas are beginning to weigh on the consumer. This could have a cascading effect on the general price level, with logistics costs exploding.
But Governor Das is focused on reviving investment demand and said economic activity that has shrunk due to Covid has yet to fully recover.