In its first policy meeting post Union Budget 2022, RBI MPC kept key policy rates unchanged and also retained its accommodative stance. In a statement, RBI said the stance will remain accommodative as long as necessary to revive and sustain growth on durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.
MPC voted unanimously for keeping interest rate unchanged. The key impacts of the RBI monetary policy will be evident across sectors.
Rate Action:
- Repo rate unchanged at 4%.
- Reverse Repo Rate remains at 3.35%
- MSF remains at 4.25%
- Bank rate steady at 4%
Economic Growth outlook:
The Reserve Bank of India projected GDP growth for FY23 at 7.8% and retained the growth projection for current financial year at 9.2%.
Quarterly growth projections for FY23:
- Q1FY23:17.2%
- Q2FY23: 7.0%
- Q3FY23: 4.3%
- Q4FY23: 4.5%
Inflation:
CPI inflation forecast for FY22 has been retained at 5.3%, which is expected to moderate to 4.5% in FY23 based on assumptions of normal monsoon. According to the RBI Monetary Policy, inflation is likely to be closer to 4% target in second half of FY23; this has provided MPC a room to remain accommodative in its policy stance.
Steps towards liquidity management:
MPC observed that, overall system liquidity continued to be in large surplus, although average absorption (through both the fixed and variable rate reverse repos) under the LAF declined from INR 8.6 lakh crore during October November 2021 to INR 7.6 lakh crore in January 2022.
To manage liquidity, RBI has announced following steps:
- Variable rate repo operations of varying tenors will henceforth be conducted as and when warranted.
- Variable rate repos and variable rate reverse repos of 14-day tenors will operate as the main liquidity management tool.
- These operations will be aided by fine turning operations.
- The Reserve Bank of India has said that with effect from March 1, the fixed rate reverse repo and Marginal Standing Facility will only be available from 5:30-11:59 PM on all days.
Development and regulatory policy:
- RBI has given extension of Term Liquidity Facility of INR 50,000 crore to Emergency Health Services and contact intensive sectors up 30 June 2022.
- RBI has proposed to increase the investment limit under Voluntary Retention Route by INR 1,00,000 crore to Rs 2,50,000 crore with effect from April 1, 2022. The revised investment limits are being notified today.
- RBI will be issuing revised Credit Default Swaps (CDS) Guidelines today.
- RBI has decided to allow banks in India to undertake transactions in the offshore Foreign Currency Settled Overnight Indexed Swap (FCS-OIS) market with non-residents and other market makers. Banks may participate through their branches in India, their foreign branches or through their IFSC Banking Units.
- To facilitate digital delivery of various government schemes to the beneficiaries, it is proposed to increase the cap on amount for e-RUPI vouchers issued by Governments to INR 1,00,000/- per voucher and allow use ofthe e-RUPI voucher multiple times (until the amount of the voucher is completely redeemed). Necessary instructions to NPCI will be issued separately.
- Keeping in view the growing liquidity requirements of the MSMEs and the requests received from the TReDS platforms, it is proposed to increase the NACH mandate limit to INR 3 crore for TReDS settlements.
Key Highlights of Governor’s statement:
Global Economy:
- The Monetary Policy committee has noted that the rapid spread of the highly transmissible Omicron variant and the associated restrictions have dampened global economic activity.
- World merchandise trade continues to grow. There are, however, headwinds emanating from persistent container and labour shortages, and elevated freight rates.
- After reversing the transient correction that had occurred towards end-November, commodity prices resumed hardening and accentuated inflationary pressures. With several central banks focused on policy normalisation, including ending asset purchases and earlier than expected hikes in policy rates.
- Financial markets have turned volatile. Sovereign bond yields firmed up across maturities and equity markets entered correction territory. Currency markets in emerging market economies (EMEs) have exhibited two-way movements in recent weeks, driven by strong capital outflows from equities with elevated uncertainty on the pace and quantum of US rate hikes. The latter also led to an increasing and volatile movement in US bond yields.
Domestic Economy:
- Available high frequency indicators suggest some weakening of demand in January 2022 reflecting the drag on contact-intensive services from the fast spread of the Omicron variant in the country.
- Rural demand indicators – two-wheeler and tractor sales – contracted in December-January according to the Monetary Policy Committee.
- Area sown under Rabi up to February 4, 2022 was higher by 1.5% over the previous year.
- Consumer durables and passenger vehicle sales contracted in November-December on account of supply constraints.
- Domestic air traffic weakened in January under the impact of Omicron.
- Investment activity displayed a mixed picture – while import of capital goods increased in December, production of capital goods declined on a YoY basis in November. Merchandise exports remained buoyant for the eleventh successive month in January 2022; non-oil non-gold imports also continued to expand on the back of domestic demand.
- The manufacturing PMI stayed in expansion zone in January at 54, though it moderated from 55.5 in the preceding month.
- Railway freight traffic, e-way bills, and toll collections posted y-o-y growth in December-January.
- Petroleum consumption registered muted growth and port traffic declined.
- Finished steel consumption contracted YoY in January; cement production grew in double digits in December.
- PMI services continued to exhibit expansion at 51.5 in January 2022, though the pace weakened from 55.5 in December.
Key highlights of press conference:
Post the RBI Monetary Policy committee meeting the Governor says, “Cryptocurrency is a threat to India’s macroeconomic stability and investors betting on it are doing it at their own risk. As far as cryptocurrencies are concerned, the RBI stance is very clear. Private Cryptocurrencies are a big threat to our financial and macroeconomic stability. They will undermine RBI’s ability to deal with issues related to financial stability. Cryptocurrencies have no underlying (asset). Not even a tulip.
Our Views:
Rate action by Reserve Bank Of India and its accommodative stance is on our expected lines. Enhancement of support to healthcare sector and contact intensive sectors was needed given resurgence of Covid. Governor has clearly expressed apprehension on currently unregulated private crypto instruments.
If inflation remains under RBI’s expected zone, we see RBI continuing with its accommodative stance even in April ,2022 MPC meeting. Key risk for continued inflation softening views of regulators will be crude oil prices.
Mangesh Kulkarni
Research Analyst | 91-22-67526636 | mangesh.kulkarni@almondzadmin
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