Mumbai: The Reserve Bank of India’s monetary policy committee (MPC) opted to keep the policy repo rate unchanged at 4%. At the same time, the MPC chose to remain accommodative while fixing its attention on soaking up extra liquidity from the economy, in a bid to ensure that inflation is kept in check while economic activity stays on a resilient growth path.
The MPC also kept the Marginal Standing Facility (MSF) – a provision that lets banks borrow from the RBI on an overnight basis – at 4%. Additionally, the RBI expanded its liquidity containing toolbox with two broad measures.
Firstly, it restored the width of the Liquidity Adjustment Facility to 50 basis points, a position that prevailed prior to the pandemic. Secondly, it decided to institute the Standing Deposit Facility – at the floor of the LAF corridor – which will be placed at 3.75%.The SDF facility allows the RBI to absorb liquidity from the banks without giving them any government collateral in return.
Accessing the SDF and the MSF will be at the discretion of the banks, unlike repo/reverse repo or OMO or CRR which are dictated by the RBI.
Inflation watch
Whatever comfort the RBI could draw from a fading and relatively weaker Omicron variant Covid wave was undone by the Russia-Ukraine offensive. The MPC’s rather tame inflation expectations have rightfully been shattered in the face of the seismic geo-political tensions that are stoking inflationary commodity cycles globally.
The earlier assessment of CPI inflation for FY23 in the February MPC meet of 4.5% now stands revised to 5.7%. The revision in terms of the forthcoming quarters is also quite drastic and signals at the larger failure of the central bank at correctly assessing the lay of the land. The MPC’s dovish stand in February at a time when a sterner, more hawkish tone, was merited drew criticism from a number of economists who warned that the RBI was far behind the curve.
Inflation forecasts by the MPC
| Quarters | February 2022 meet | April 2022 meet (revised) |
| Q1FY23 | 4.9% | 6.3% |
| Q2FY23 | 5% | 5.8% |
| Q3FY23 | 4% | 5.4% |
| Q4FY23 | 4.2% | 5.1% |
| FY23 | 4.5% | 5.7% |
“Heightened geopolitical tensions since end-February have, however, upended the earlier narrative and considerably clouded the inflation outlook for the year,” RBI governor Shaktikanta Das said in his statement.
Governor Das is counting on a likely record Rabi harvest that will aid in keeping domestic prices of cereals and pulses in control. Rising fertiliser prices – thanks to a global scarcity not just in fertiliser ingredients but also in finished products – will contribute to elevated input costs for the farmers, and other stakeholders in the supply chain, leading to a spillover impact on prices of poultry, milk and other dairy products.
Commenting on the anticipated inflationary spike in non-food items, the governor said, “The spike in international crude oil prices since end February poses substantial upside risk to inflation through both direct and indirect effects. Sharp increase in domestic pump prices could trigger broad-based second round price pressures. A combination of high international commodity prices and elevated logistic disruptions could aggravate input costs across agriculture, manufacturing and services sectors. Their pass-through to retail prices, therefore, warrants continuous monitoring and pro-active supply management.”
However, the governor also struck a note of caution pointing out that any projection of growth and inflation is fraught with risk, “given the excessive volatility in global crude oil prices since late February and the extreme uncertainty over the evolving geopolitical tensions.”
“The MPC is of the view that since the February meeting, the ratcheting up of geopolitical tensions, generalised hardening of global commodity prices, the likelihood of prolonged supply chain disruptions, dislocations in trade and capital flows, divergent monetary policy responses and volatility in global financial markets are imparting sizeable upside risks to the inflation trajectory and downside risks to domestic growth.” the MPC resolution stated.
