Monetary policy: RBI surprises with dovish note as growth concerns weigh

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Amid expectation that the will ‘formally’ announce unwinding of the ultra-loose monetary policy stance by hiking the reverse repo rate, the six-member monetary policy committee decided to hold both the repo and the reverse repo and continued with the accommodative stance as worry over growth continues to weigh. This was the tenth straight policy when the repo rate was left unchanged at 4 per cent and the reverse repo rate at 3.35 per cent. Both the rates were last changed in May 2020.


While the RBI decided to roll back some of the operational measures pertaining to the liquidity framework – announced when the coronavirus (Covid-19) pandemic struck two years ago – the tone of the policy remained more dovish than what was expected resulting in bond and stock prices surging after Governor Shaktikanta Das announced the outcome of the bimonthly review meeting.





Observing that consumer price inflation is expected to peak in the current quarter while the output is barely above pre-pandemic levels, Das said there was a need to continue with the policy support.


“Overall, taking into consideration the outlook for inflation and growth, in particular the comfort provided by the improving inflation outlook, the uncertainties related to Omicron and global spillovers, the MPC was of the view that continued policy support is warranted for a durable and broad-based recovery,” Das said while announcing the policy review.


RBI projected real GDP growth at 7.8 per cent for 2022-23; 17.2 per cent for the Q1, 7 per cent for Q2, 4.3 per cent for Q3 and 4.5 per cent for Q4. The growth projection for the next financial year is lower than what the government estimated, between 8 to 8.5 per cent


Assuming a normal monsoon, CPI inflation for 2022-23 is projected at 4.5 per cent with Q1:2022-23 at 4.9 per cent; Q2 at 5.0 per cent; Q3 at 4.0 per cent; and Q4 at 4.2 per cent.


Das reiterated that RBI actions will be well telegraphed, as opposed to data driven as some of the MPC members had suggested during the previous policy review meeting.


“Sometimes markets expect dessert, but then realize that the main course is still not over,” said Aurodeep Nandi, India economist and vice president at Nomura.


“RBI surprised by not only doubling down on its now familiar orthodoxy of keeping rates and stance unchanged, but also expressed a very dovish outlook for inflation for FY23, forecasting it at 4.5 per cent. This comes despite higher oil and commodity prices, growth-supporting fiscal policy, continued economic normalisation, and a distinctly hawkish Federal Reserve. This suggests that the RBI is likely to remain behind the curve, until macro circumstances warrant a shift of gears.”


The yield on the 10-year benchmark government bond fell 7 bps and it was trading at 6.73 per cent while the Sensex was up 0.61 per cent or 360 points.


The central bank refrained from normalising the policy stance, but announced some rollback in the liquidity management framework in a move toward normalisation the liquidity situation.


“With the progressive return of normalcy, including transient demand for liquidity from the RBI, it is logical to restore the revised liquidity management framework in order to make it more flexible and agile,” Das said.


Four steps were announced to restore the liquidity framework:


First, variable rate repo operations of varying tenors will henceforth be conducted as and when warranted by the evolving liquidity and financial conditions within the cash reserve ratio (CRR) maintenance cycle.


Second, variable rate repos (VRRs) and variable rate reverse repos (VRRRs) of 14-day tenor will operate as the main liquidity management tool based on liquidity conditions and will be conducted to coincide with the CRR maintenance cycle.


Third, these main operations will be supported by fine-tuning operations to tide over any unanticipated liquidity changes during the reserve maintenance period. Auctions of longer maturity will also be conducted as warranted.


Fourth, with effect from March 1, 2022, the Fixed Rate Reverse Repo and the MSF operations will be available only during 17.30-23.59 hours on all days and not during 09.00-23.59 hours, as instituted from March 30, 2020 to deal with the pandemic situation.



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