RBI chooses growth over inflation; here's what experts have to say on MPC

While retaining the repo rate at 4 per cent, the Reserve Bank of India (RBI) chose to support growth over inflation in the bi-monthly monetary policy on Friday. However, while recognising the challenges triggered by higher crude oil prices due to Russia and Ukraine war, the central bank slashed the GDP growth projected to 7.2 per cent for FY23 from 7.8 earlier. It also raised the CPI inflation projection to 5.7 per cent for the ongoing financial year from 4.5 earlier. This is based on the assumption of crude at $100.

This means that the growth and inflation can be better going ahead if crude falls sharply if the war ends early and vice-versa. On the other hand, RBI has decided to fully restore the liquidity management framework instituted in February 2020. The RBI Governor Shaktikanta Das said that the central bank to introduce the standing deposit facility (SDF). The SDF is also a financial stability tool in addition to its role in liquidity management.

Meanwhile, market watchers welcome the RBI’s continued accommodative stance and status quo on the repo rate. However, some analysts believe that the central bank may hike the interest rate in the August policy. Here’s what they have to say.

Suvodeep Rakshit, senior economist, Kotak Institutional Equities

The rate corridor has now effectively reduced to 25 bps compared to 65 bps earlier. The SDF window will become the new floor at 3.75 per cent even as the reverse repo rate is at 3.35 per cent. The policy has decidedly shifted away from being dovish. Commitment has also been made to start the withdrawal of liquidity from FY2023 and over the next few years. This policy strengthens our view that the first repo rate hike will be in the August policy. We expect the stance to be changed to “neutral” from “accommodative” in the June policy.”

Lakshmi Iyer, chief investment officer (Debt) and head products, Kotak Mahindra Asset Management Company

The RBI has introduced SDF at 3.75 per cent, this effectively means the overnight rates will have a floor of 3.75 per cent (rise by 40bps). This policy, in some sense, paves the way to tightening policy rates in the coming months. We expect yields to rise across the curve to reflect the policy stance. The key to seeing for the longer end of the curve is if RBI walks the talk by announcing OMO/OT to anchor long bond yields.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers

With today's measures RBI has moved to the path of gradual increase of policy interest rate and phased withdrawal of liquidity. From a medium-term perspective, the measures are supportive of growth, price stability and orderly development in the financial markets.

Shishir Baijal, Chairman & Managing Director at Knight Frank India

For the real estate sector, a low-interest rate for a long period is a key catalyst for the resurgence of demand.  The status quo on repo rates will help maintain the current demand levels as the interest rate for both homebuyers and developers are likely to be maintained by financial institutions.

Abhay Agarwal, founder, fund manager, Piper Serica

The RBI has chosen to support growth over inflation by keeping the rates at the same level. We believe it is a sensible choice for India to attract foreign capital. It has tried its best to balance the sharp increase in inflation forecast and a lower GDP growth forecast. We believe that RBI does not want to signal a series of rate hikes that will increase the cost of borrowing and negatively impact the nascent recovery in consumer sentiment, manufacturing, and rural income. The hope is that with supply bottlenecks easing the inflation will trend down.

We believe that RBI will use tactical measures like OMO, operations twists and exchange rate management to fight liquidity-driven inflation rather than increase policy rates.

Sonam Srivastava, founder, Wright Research

The overall outcome of the MPC’s decision is hinting toward recovery. However, an acknowledgement of geopolitical tension in Europe with soaring commodity prices has been stated by the governor which would mean that the expected recovery might not be at a good pace for quite some time.