Insights

In a surprising move, the monetary policy committee (MPC) of the RBI on Wednesday unanimously voted to up the repo rate by 40 basis points to 4.40%. MPC members met in unscheduled meeting and decided to go unanimously for rate hike-a first move since policy rate action in May 2020. As mentioned in April MPC meeting statement, RBI has started calibrated withdrawal of its ‘Accommodative’ stance to ensure that Inflation remains within the target going forward while supporting the growth. Though Governor has mentioned that stance of the RBI monetary policy still remains ‘Accommodative’, it intends to keep inflation numbers within its targeted levels of 4% within a band of +/-2% while supporting growth.

LAF corridor maintained at 50 bps with Standing Deposit Facility (SDF) rate getting adjusted to 4.15% as floor and MSF at the upper end of band at 4.65%. CRR is also increased by 50 bps to 4.5% of NDTL w.e.f May 21, 2022. As per the RBI Monetary Policy May 2022, the Reverse Repo Rate remained unchanged at 3.35%.

Key Highlights of The RBI Monetary Policy May 2022 Statement:

Domestic Growth:

Economic activity is getting back to normalcy post third wave of Covid. Private consumption is gaining traction with rise in discretionary spending. Normal monsoon going ahead has brightened agriculture prospects and this should support rural demand. The RBI Monetary Policy in May 2022 opines that there are signs of revival in investment cycle. Rising imports, rise in production of capital goods, increasing capacity utilisation that is supported by conducive financial conditions and stronger corporate balance sheet. Exports growth has remained buoyant. These indicators, according to the Monetary Policy India show durable revival in domestic demand. Downside risk to growth outlook will be from global events like protracted and intensifying geo-political tensions, elevated commodity prices, Covid related lockdowns or restrictions in key economies, slowing external demand and tightening global financial conditions on the back of monetary policy normalisation in advanced economies.

Inflation:

Sharp rise in inflation in March 2022 to 7% was propelled in particular by food inflation due to adverse spillovers from unprecedented high global food prices. In April also food inflation is likely to remain high. Along with this there is rise in domestic pump prices of petroleum products adding to inflationary pressure. Food inflation is likely to continue going ahead. Prices of edible oils may firm up further due to export restrictions by major producing countries and loss of sunflower oil output due to war. Poultry and dairy products are also likely to remain high. International crude oil prices continue to remain above USD 100 per barrel. There is upward risks to inflation trajectory presented in April MPC resolution. These circumstances have led to withdrawal of accommodative stance in the RBI monetary Policy. Rate action taken today is reversal of rate action of May 2020.

Liquidity:

Banking system liquidity has remained comfortable since April MPC meeting announcement. To gradually withdraw excess liquidity in system, RBI has decided to increase CRR by 50 bps effective from the fortnight beginning May 21, 2022. This will lead to withdrawal of excess liquidity to the tune of INR 87000 cr.

External sector:

India’s external sector has remained resilient amidst formidable global headwinds. India is doing well on exports front. Potential market opportunities have opened up due to geopolitical conditions and recent trade agreements. Net foreign direct inflows have remained robust, despite some recent moderations. ECB flows also remain stable. India’s forex reserves remain sizeable. External debt to GDP ratio remains low at 20%.

Our Views:

Rate action, although in an unscheduled meeting was on expected lines given the sharp rise in inflation numbers. Inflation which initially looked transient has persisted due to global factors and the monetary policy of India needs to encompass that. Though the move may look at behind the curve, it is in right direction. The RBI monetary policy May 2022 foresees that Lenders are likely to pass on this rate hike in near term leading to higher borrowing costs for retail as well as wholesale borrowers. Hike in CRR will lead to absorbing excess liquidity in the system. Going ahead, post monsoon we expect another round of rate hike by regulator in the Monetary Policy India of FY23.

Mangesh Kulkarni | Research Analyst

Tel: 91-22-67526636

Email: mangesh.kulkarni@almondz.com

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