The Reserve Bank of India (RBI) kept its key interest rate and monetary stance unchanged but announced a clear intent to rein in surging prices, signalling a possible shift in policy at the next review meeting in June.

“In our sequence of priorities, we have now put inflation before growth,” Governor Shaktikanta Das told reporters in a conference. “For the last three years, starting February 2019, we had put growth ahead of inflation. The stance continues to be accommodative while focussing on withdrawal of accommodation. So, we are gradually moving away from that stance, which has been there for more than two years.”

The central bank raised its FY23 inflation estimate and lowered that for economic growth, warning that those forecasts were based on oil at $100 a barrel. The RBI said it will have a “nimble-footed” approach to liquidity, introducing the Standing Deposit Facility (SDF) to manage excess cash in the system.

Governor Das said excess liquidity would recede though it may be a “multi-year” programme, further indicating higher interest rates and change of stance. The repo rate, at which banks borrow from the central bank, remains at 4%. The reverse repo rate, at which banks park surplus cash with the RBI, remains at 3.35%. Both rates have been unchanged since the start of the pandemic.

Equity markets cheered the policy while the bond market got the jitters.

Unanimous Decision

The bond market had been expecting inaction or no harsh commentary from the central bank due to high government borrowings.

The Sensex rose 0.70% to 59,447.18 points, while the benchmark bond yield soared 21 basis points to 7.12%, close to a three-year year high. A basis point is 0.01 percentage point.

The policy “marked a shift from their long-standing strong dovish disposition, taking inflation back to the centre of their policy dashboard”, said Radhika Rao, economist at DBS Bank. “The tweak in the guidance to acknowledge the need to start withdrawal of accommodation leaves the June rate review live for a change in the stance to neutral.”

An ET poll of 21 market participants had forecast the RBI would keep the policy stance and key rates unchanged as its declared aim was to ensure a durable economic recovery.

“The Russia-Ukraine conflict has clearly played a key role in the RBI finally prioritising inflation ahead of growth,” said Aurodeeb Nandi, economist at Nomura Securities. “So while the RBI is still maintaining its accommodative stance, it is interesting that within a span of the last couple of months, the RBI has gone from being ultra-accommodative to talking about withdrawal of accommodation.”