RBI Monetary Policy: Central bank leaves repo rate unchanged; Guv Das says inflation expected to peak in Q4

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged in its February policy meeting, Governor Shaktikanta Das said on Thursday. With no change this time as well, the repo rate currently stands at 4 percent. The reverse repo rate has been maintained at 3.35 percent.

The MPC voted unanimously to keep policy rates unchanged. While a majority of 5:1 decided to continue with “accommodative”  stance. The “accommodative” stance could continue for as long as necessary to revive growth, said Das while announcing policy.

The repo rate is the rate at which the central bank of the country lends funds to the commercial banks. The commercial banks borrow funds only if they witness a shortfall in their funds. The monetary policy committee of a country uses the reverse repo rate as a tool to control the money supply in the country.

The announcement is in line with the Street's expectations as largely it was expecting a status quo by the central bank this time as well.

The MSF rate has also been left unchanged at 4.25 percent.

The governor said that the central bank has been continuously taking efforts to limit disruption caused by the pandemic to the economic activity. Das said that policy actions of RBI have yielded desired result and now the central bank has turned to rebalance liquidity. "Passive liquidity management worked well in the pandemic," he said.

The governor said that current account deficit is seen contained well below 2 percent of GDP for FY22 and that Indian rupee has shown resilience. “RBI will insulate domestic market from global spillovers,” said Das.

However, Das stated that continued policy support is needed for durable and broad-based recovery.

The RBI has projected Q1FY23 GDP growth at 17.2 percent while it sees Q2 growth at 7 percent, Q3 growth at 4.3 percent and Q4 growth at 4.5 percent. The central bank forecasts FY23 GDP growth at 7.8 percent.

According to Das, capacity utilisation is rising and aiding in investment demand.

Das said that CPI inflation has edged higher but along the expected lines and the headline inflation is expected to peak in Q4FY22 and then moderate in H2FY23.

Easing food prices are adding to optimism but hardening crude oil prices remain a major upside risk, said Das. Transmission of costs remains muted on slack in demand, he added.

The central bank has maintained the CPI inflation forecast of 5.3 percent for FY22 and forecasts FY23 CPI inflation at 4.5 percent. It sees CPI inflation at 4.9 percent for Q1FY23, 5 percent for Q2, 4 percent for Q3 and 4.2 percent for Q4.

VRRRS have become the main option for managing liquidity, said Das, adding that the effective reverse repo rate rose from 3.37 percent in August 2021 to 3.87 percent on Feb 4, 2022.

System liquidity remains in large surplus, according to Das, who said that auctions of longer maturities will be conducted as needed.

Among other important announcements, the on-tap credit for health, contact intensive services is extended till June from March, FPI voluntary retention route cap has been raised to Rs 2.5 tn and e-rupee voucher cap has been raised from Rs 10,000 to Rs 1 lakh per voucher.