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Important takeaways from the recent Monetary Policy Meeting held by the RBI Governor, Shaktikanta Das

Important takeaways from the recent Monetary Policy Meeting held by the RBI Governor, Shaktikanta Das

Following global cues, the Reserve Bank of India raised inflation projections for the country to 5.7 per cent, 120 basis points higher than previous projections. The RBI said it has made these projections assuming that crude oil prices remain at $100 per barrel on an average in the year. RBI’s projections on inflation are higher than analysts’ expectations from the central bank who were expecting CPI forecast of 5.25 per cent. For FY 2023, inflation is now projected in Q1 at 6.3 per cent; Q2 at 5.8 per cent; Q3 at 5.4 per cent; and Q4 at 5.1 per cent.

The Reserve Bank of India has also cut growth projections for India to 7.2 cent, lower than earlier projection of 7.8 per cent. Growth is expected to be 16.2 per cent in Q1; 6.2 percent in Q2; 4.1 percent in Q3; and 4.0 per cent in Q4. It should be noted that earlier projections were made in the absence of the Russia Ukraine war, and the resultant sanctions and global supply chain crunch. “While India’s direct trade and financial exposures are modest, indirect spillovers from the slowing global economy, the sharp jump in commodity prices across the board and elevated risk aversion and uncertainty owing to geopolitical developments weigh heavily on the outlook,” according to the RBI statement.

In line with expectations from economists, the Reserve Bank of India voted unanimously to keep both repo rates and reverse repo rates changed at 4 percent and 3.35 percent respectively. The RBI MPC also kept bank rates unchanged at 4.25 per cent.

RBI’s MPC also decided to stick with an accommodative stance and said the central bank will support growth, since the economic activity is barely above its pre-pandemic levels. “The MPC also decided unanimously to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” RBI governor Das said.

To manage excess liquidity in the market, which is at an overhang of Rs 8.5 lakh crore. The RBI said in a gradual and calibrated manner, it will withdraw Rs 8.5 lakh crore of liquidity from the system beginning this year, over a multi-year time frame in a non-disruptive manner. Excess liquidity provided by the central bank during the pandemic of about Rs 5 lakh crore, have already been withdrawn or returned on the lapse of various facilities like VRRR (variable rate reverse repo), VRR (variable rate repo) auctions.

In a move to manage liquidity, RBI announced normalization of the LAF (liquidity adjustment facility) corridor to pre-pandemic levels at 50 basis points, and introduced the Standing Deposit Facility or SDF at 3.75 per cent.

RBI expects the current account deficit to remain at sustainable levels. “Despite the sharp jump in crude oil and other commodity prices, we expect the 8 current account deficits to remain at sustainable levels which can be financed with normal capital flows,” Das said in the statement. India’s foreign exchange reserves stand at $ 606.5 billion as on April 1, 2022, which are further bolstered by the net forward assets of the RBI.

RBI said it will publish a paper on climate risk and sustainable finance in the coming days. “To facilitate better understanding and assessment of the potential impact of climate-related financial risks by Regulated Entities, a Discussion Paper on Climate Risk and Sustainable Finance will be published shortly for feedback,” it said.

RBI also announced the introduction of card-less cash withdrawal at ATMs. “It is now proposed to make card-less cash withdrawal facilities available across all banks and ATM networks using the UPI. In addition to enhancing ease of transactions, the absence of the need for physical cards for such transactions would help prevent frauds such as card skimming, card cloning, etc.,” according to the statement.

The governor concluded the meeting with Mahatma Gandhi’s quote on having faith in uncertain times. “The sky today may be overcast with clouds, but we will use all our energies, resolve and resources to let the sunlight illuminate India’s future,” Shaktikanta Das said. “Let me end by recalling what the father of our nation, Mahatma Gandhi said long ago: “It is faith that steers us through stormy seas, faith that moves mountains and faith that jumps across the ocean,” he added.

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