Mumbai, NFAPost: Reserve Bank of India (RBI) on Thursday kept the benchmark interest rate unchanged at 4% and decided to continue with its accommodative stance in the backdrop of an elevated level of inflation
This is the tenth time in a row that the Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das has maintained the status quo. RBI had last revised its policy repo rate or the short-term lending rate on May 22, 2020 in an off-policy cycle to perk up demand by cutting the interest rate to a historic low
This is the first MPC meeting after presentation of Budget 2022-23 in Parliament on February 1. MPC has decided to keep benchmark repurchase (repo) rate at 4%, Das said while announcing the bi-monthly monetary policy review
Consequently, the reverse repo rate will continue to earn 3.35% interest for banks for their deposits kept with RBI
Das said MPC voted unanimously for keeping interest rate unchanged and decided to continue with its accommodative stance as long as necessary to support growth and keep inflation within the target
RBI retained its growth projection at 9.2% and inflation at 5.3% for the current financial year
Retail inflation rose to a five-month high of 5.59% in December from 4.91% in November, mainly due to an uptick in food prices
MPC has been given the mandate to maintain annual inflation at 4% until March 31, 2026, with an upper tolerance of 6% and a lower tolerance of 2%.
The bi-monthly policy comes against the backdrop of the Budget wherein a nominal gross GDP of 11.1% has been estimated for 2022-23
The government expects this growth to be fuelled by a massive capital spending programme outlined in the Budget with a view to crowd-in private investment by reinvigorating economic activities and creating demand
Finance Minister Nirmala Sitharaman raised capital expenditure (capex) by 35.4% for the financial year 2022-23 to Rs 7.5 lakh crore to continue the public investment-led recovery of the pandemic-battered economy. The capex in the current financial year is pegged at Rs 5.5 lakh crore
The spending on building multimodal logistics parks, metro systems, highways, and trains is expected to create demand for the private sector as all the projects are to be implemented through contractors
With regard to borrowing, the government plans to borrow a record Rs 11.6 lakh crore from the market in 2022-23 to meet its expenditure requirement to prop up the economy. This is nearly Rs 2 lakh crore higher than the current year’s Budget estimate of Rs 9.7 lakh crore
Even the gross borrowing for the next financial year will be the highest-ever at Rs 14,95,000 crore as against Rs 12,05,500 crore in the Budget Estimate (BE) for 2021-22
Fiscal deficit — the excess of government expenditure over its revenues — is estimated to come down to 6.4% of GDP next year as against 6.9% pegged for the current fiscal ending March 31.
Commenting on the development, Stashfin Cofounder Shruti Aggarwal said RBI’s decision of maintaining balance between economic growth and inflation by keeping a status quo on interest rates is definitely based on the pulse of Indian citizens and economy.
“It’s very challenging to find a sweet spot and it seems to be in-sync with the market and should further help keep inflation below 6%. Indian startups and fintech industry is also all set to grow faster than anywhere around the globe and this accommodative policy will further boost the confidence,” said Stashfin Cofounder Shruti Aggarwal.
Andromeda and Apnapaisa CEO V Swaminathan said keeping the rates unchanged is a signal that growth is being prioritised over all else. “It remains to be seen what happens over the next quarter but clearly an unto pirates but welcome step,” said Andromeda and Apnapaisa CEO V Swaminathan.
SBI Chairman Dinesh Khara said the RBI policy statement is an affirmation to keep the rate structure at reasonable levels to support an incipient growth recovery.
“Amidst global uncertainties, the policy has provided admirable support to market sentiments and has rightfully indicated it has enough non-conventional measures to keep the demand-supply of g-secs in reasonable balance. The regulatory guidelines of credit default swap and rupee derivatives market will ensure a deepening of markets. The enhancement of cap under e-RUPI could facilitate a faster adoption of digital transactions, that could eventually usher in a roll out of digital rupee,” said SBI Chairman Dinesh Khara.
Commenting on the RBI decision, Bank of Baroda Chief Economist Madan Sabnavis said the surprise element in the credit policy is the very dovish stance taken by the MPC which in a way supports the expected large government borrowing programme as well as the corporates that will be borrowing funds this year.
“The take on inflation is fairly aggressive for FY23 as the forecast of 4.5% assumes that the oil economy remains stable, which is probably the biggest risk today. The forecast for growth is slightly less sanguine than the government, which forms the basis for taking a rather conservative view on the durability of growth. This all means that the indication is that as of now it looks like the repo rate will not be increased in FY23 unless the numbers turn really adverse,” said Bank of Baroda Chief Economist Madan Sabnavis.
He also said the RBI has not spoken of withdrawing surplus liquidity but in bringing in predictability on managing the same by using the V3R route to stabilise the same.
“And this is something which is important because the market is always trying to predict the RBI action and by providing guidance, the message is clear. The impact on the market has been more than soothing as the 10 year yield has come down and will probably remain in the stable region of 6.75-80% in the near term,” said Bank of Baroda Chief Economist Madan Sabnavis.