RBI lending rates remain the same, inflation projection raised

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on April 8, based on an assessment of the macroeconomic situation and the outlook, voted unanimously to keep the policy repo rate unchanged at 4%.

 “The MPC also unanimously decided to remain accommodative while focussing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” RBI governor Shaktikanta Das said while making the announcement.

The marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25%.

Further, the Reserve Bank has decided to restore the width of the Liquidity Adjustment Facility (LAF) corridor to 50 basis points, the position that prevailed before the pandemic.

“The floor of the corridor will now be provided by the newly instituted standing deposit facility (SDF), which will be placed 25 basis points below the repo rate, i.e., at 3.75%,” he said.

Explaining the MPC’s rationale for its decision on the policy rate and the stance, he said the expected positive benefits from the ebbing Omicron wave have been offset by the sharp escalation in geopolitical tensions.

“This has significantly changed the external and domestic landscape. Concerns over protracted supply disruptions have rattled global commodity and financial markets, given the significant share of the two economies engaged in war in global production and exports of key commodities like oil and natural gas; wheat and corn; palladium, aluminium and nickel; edible oils; and fertilizers. Global crude oil prices briefly crossed US$ 130 per barrel, touching their highest level since 2008 and remain volatile at elevated levels, despite some correction,” he added.

“Global food prices, along with metal and other commodity prices, have also hardened significantly. Risk aversion towards assets of emerging market economies (EMEs) has increased, leading to large capital outflows and a depreciating bias in their currencies. These developments have, first, ratcheted up the projections of global inflation, which was already running well above targets in major countries; and second, will produce sizeable adverse impact on output across geographies,” he said.

Emphasising that geopolitical tensions have exacerbated at a time when the global economy was grappling with a sharp rise in inflation and consequent monetary policy normalisation in major advanced economies, he said global supply chain disruptions and input cost pressures are now expected to linger even longer. 

“The resurgence of COVID-19 infections in some major economies in March and the associated lockdowns run the risk of further aggravating the global supply bottlenecks and input cost pressures. World trade and output and hence external demand are likely to be weaker than envisaged two months ago,” he said.

Overall, the external developments during the past two months have led to the materialisation of downside risks to the domestic growth outlook and upside risks to inflation projections presented in the February MPC resolution, he noted.

Inflation is now projected to be higher and growth lower than the assessment in February. Economic activity, although recovering, is barely above its pre-pandemic level, he added.

The governor said as the horizon was brightening up, escalating geopolitical tensions have cast a shadow on our economic outlook.

Under this circumstances the real GDP growth for 2022-23 is now projected at 7.2% with Q1:2022-23 at 16.2%; Q2 at 6.2%; Q3 at 4.1%; and Q4 at 4.0%, assuming crude oil (Indian basket) at US$ 100 per barrel during 2022-23, Mr. Das said.

Similarly, inflation is now projected at 5.7% in 2022-23, with Q1 at 6.3%; Q2 at 5.8%; Q3 at 5.4%; and Q4 at 5.1%.

In his opening remarks, he observed, “We are confronted with new but humungous challenges – shortages in key commodities; fractures in the international financial architecture; and fears of deglobalisation. Extreme volatility characterises commodity and financial markets.”

“While the pandemic quickly morphed from a health crisis to one of life and livelihood, the conflict in Europe has the potential to derail the global economy. Caught in the cross-current of multiple headwinds, our approach needs to be cautious but proactive in mitigating the adverse impact on India’s growth, inflation and financial conditions,” he added.

“We are, however, reassured by the strong buffers that we have built over the past few years, including large foreign exchange reserves, significant improvement in external sector indicators and substantial strengthening of the financial sector, all of which would help us to weather this storm. Once again, we in the RBI stand resolute and in readiness to defend the economy and navigate out of the current storm,” he further added.