The Monetary Policy Committee has, unanimously, opted to maintain the repo rate at 4.00%. With a 5-1 majority, the committee also opted to maintain an accommodative stance in order to support economic growth and recovery, RBI Governor Shaktikanta Das announced on Thursday.

This is the tenth consecutive time that the rate has remained unchanged. The central bank had last revised the policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low.

The MPC also opted to keep the marginal standing facility (MSF) unchanged at 4.25%. Further, the reverse repo rate has been left unchanged at 3.35%.

The reverse repo rate is the rate at which the RBI borrows money from the banks in the short term. It is currently 3.3%. The RBI borrows money from the banks to suck out the excess liquidity in the system. Analysts had expected the RBI to raise the reverse repo rate by about 15-40 basis points while penciling measures to support the Union Budget that pump primed growth with larger capex and record market borrowings.

A hike in reverse repo rate, which experts say is largely priced in by the markets, would have signaled that the central bank is ready to pursue policy normalisation. It may be noted that the RBI, via variable rate reverse repo (VRRR) has already been sucking out the excess liquidity in the system.

The last MPC held in December 2021 had kept the benchmark interest rate unchanged at 4% and decided to continue with its accommodative stance against the backdrop of concerns over the emergence of the new coronavirus variant Omicron.

The MPC has been tasked by the government to keep inflation in the range of 2-6%.

Inflation & growth outlook

On the growth front, RBI Governor Das said that the central bank now sees FY23 growth at 7.8%. Further, it has forecast Q1FY23 growth at 7.2%, Q2 at 7%, Q3 at 4.3%, and Q4 at 4.5%.

When it comes to inflation, the RBI’s CPI inflation forecast for FY22 has been retained at 5.3%.

“CPI inflation expected to moderate closer to 4.00 percent target in the second half of FY23 and provide room for monetary policy to remain accommodative,” he said,

“We have made effort to limit the disruption to economic activity. While CPI edged higher, it is along expected lines. Core inflation remains elevated and headline inflation is expected to peak in Q4FY22 and turn moderate in H2GY23. Continued policy support is warranted for a durable, broad-based recovery,” Governor Das said.

The latest CPI-based retail inflation reading, December 2021, came in at a five-month high of 5.6%, much closer to the upper end of the tolerance band. More worryingly, the core inflation stood at 6.2% YoY for the third consecutive time.

This was the sixth and last bi-monthly monetary policy for the current financial year.

In his reply to the motion of thanks on President’s address in Rajya Sabha, Prime Minister Narendra Modi had noted that countries like the USA, Britain have been facing decadal high inflation. He had further said that under his reign, i.e. between 2015 and 2020, the rate of inflation in India was 4-5% but during the UPA regime, the Indian economy witnessed double-digit inflation.

What are the global central banks doing?
Global central banks, including the US Federal Reserve and the European Central Bank (ECB) have turned hawks and are expected to hike rates soon. Bank of England has already hiked rates two consecutive times.

When it comes to asset purchase programmes, the Fed has provided guidance that it expects to end its asset purchases by March 2022. The ECB on the other hand, has indicated that it plans on continuing versions of its asset purchase programs through 2022 and into 2023.