RBI policy review: Rates on hold, lower GDP forecast and other key takeaways

The Reserve Bank of India (RBI) on Friday kept the benchmark repo and reverse repo rates unchanged, and kept its monetary stance accommodative, although it did signal that it was keeping a close watch on rising inflation.

The central bank, however, lowered India’s growth forecast for 2022-23 from 7.8% to 7.2%. 

The repo rate will remain at 4% while the reverse repo rate will be 3.35%. 

This is the eleventh time that the Indian central bank has kept its interest rates unchanged since May 2020, when the key lending rate was cut to a historic low of 4%. 

The RBI said that rising inflation remains a worry as retail inflation rose to an eight-month high of 6.1% in February 2022, while wholesale inflation inched up to 13.1%. 

Key takeaways 

1) Inflation for the next financial year is projected at 5.7%.

2) The 2022-23 GDP projection has assumed the price of crude at $100 per barrel.

3) RBI to do gradual and calibrated withdrawal of liquidity.

4) Easier risk weight for housing loans extended till 31 March.

5) SDF rate at 3.75%, MSF rate at 4.25%. RBI to restore LAF corridor to 50 bps, as it was pre-COVID.

6) RBI said that a robust rabi crop should support rural demand; pickup in contact-intensive services to help boost urban demand.

7) RBI sees current account deficit at sustainable levels.

8) India’s forex reserves are at $606.5 billion.

9) Cardless cash withdrawals to be made available across ATMs of all banks.

10) To issue norms on cybersecurity for payment system companies.

What more did the RBI say?

RBI governor Shaktikanta Das said that the global economy has seen major changes in the wake of the Covid pandemic over the last two years and that the war in Ukraine has escalated global geopolitical tensions. 

“Now, two years later as we were emerging out of the pandemic situation, the global economy has seen tectonic shifts beginning 24th February with the commencement of the war in Europe, followed by sanctions and escalating geopolitical tensions,” Das said. 

“We are reassured by strong buffers we have built over the few years, including. large forex reserves, significant improvement in external indicators & strengthening of financial sector. We at RBI stand resolute and in readiness to navigate the economy out of the current storm,” said Das.

Das however said that developments in Europe “have materialised downside risks to domestic growth and upside risks to inflation projections.” 

How have the markets reacted to the central bank’s policy statement?

The markets were in the red, given that the central bank has lowered India’s growth estimates. The Indian rupee surged 21 paise against the US dollar to reach 75.82, even as the central bank said that inflation was a worry and that crude was likely to remain above the $100 per barrel mark.