RBI revises inflation and growth forecasts; holds policy rates

In its first monetary policy announcement of 2022-23, the RBI projected inflation to be at 5.7 per cent this financial year. Real GDP growth for the year estimated at 7.2 per cent

Reserve Bank of India's (RBI) six-member monetary policy committee (MPC) on Friday voted unanimously to keep the policy repo rate unchanged at 4 per cent and decided to remain accommodative but focus on withdrawal of accommodation to ensure inflation remains within the target while also supporting growth.

With the volatile external environment due to the geo-political situation in eastern Europe posing a downside risk to downside risks to domestic growth and upside risk to inflation projections, the RBI has revised its inflation projection upwards and sharply cut its growth projections for the economy in the current financial year.

RBI is projecting inflation at 5.7 per cent in 2022-23, with 6.3 per cent in Q1; 5.8 per cent in Q2; 5.4 per cent in Q3; and 5.1 per cent in Q4. The gross domestic product growth (GDP) for 2022-23 is being projected at at 7.2 per cent with Q1FY23 at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4.0 per cent. Both the projections are based on the assumption that crude oil will be at $100 per barrel during the year.

Bond yields jumped sharply as RBI revised inflation projection ateeply. The 10-year bond yield was at 7.002 per cent at 11:18 am, a jump of 1.27 per cent since yesterday’s close at 6.996 per cent.

“It may, however, be noted that given the excessive volatility in global crude oil prices since late February and the extreme uncertainty over the evolving geopolitical tensions, any projection of growth and inflation is fraught with risk, and is largely contingent upon future oil and commodity price developments”, Shaktikanta Das, governor, RBI said in his statement.

In the February monetary policy, GDP growth for FY23 year was projected at 7.8 per cent by the RBI, lower than what the Economic Survey kept at 8-8.5 per cent. Similarly, headline inflation was projected at 4.5 per cent for the entire financial year (FY23). The market was visibly surprised by the central bank’s inflation projection, pegged at 4.5 per cent, for FY23 despite crude oil prices hovering above $90 a barrel.

The RBI has also decided to restore the width of the liquidity adjustment facility (LAF) corridor to 50 bps, the position that prevailed before the coronavirus (Covid-19) pandemic. The floor of the corridor will now be provided by the newly instituted standing deposit facility (SDF), which will be placed 25 bps below the repo rate at 3.75 per cent. SDF allows the RBI to absorb liquidity from commercial banks without giving government securities in return to the banks.

“By removing the binding collateral constraint on the central bank, the SDF strengthens the operating framework of monetary policy. Accordingly, it has now been decided to introduce the SDF as the floor of the LAF corridor," Das said.

“This would provide symmetry to the operating framework of monetary policy by introducing a standing absorption facility at the bottom of the LAF corridor, similar to the standing injection tool at the upper end of the corridor, namely the marginal standing facility (MSF). Thus, at both ends of the LAF corridor, there will be standing facilities – one to absorb and the other to inject liquidity,” Das added.

Currently, the liquidity management function of the RBI is characterised by two-way operations through variable rate reverse repo (VRRR) auctions of varying maturities to absorb liquidity; and variable rate repo (VRR) auctions to meet transient liquidity shortages and offset mismatches. Both these approaches will continue, the governor said.

“It may be noted that the interest rate for around 80 per cent of the total liquidity absorbed under the LAF during Q4:2021-22 has firmed up close to the policy repo rate due to the rebalancing of liquidity through VRRR auctions. Accordingly, financial market participants have been prepared for the eventual normalisation of the LAF corridor,” Das said.

The RBI injected liquidity facilities to the tune of Rs 17.2 trillion during the Covid-19 pandemic of which Rs 11.9 trillion was utilised. So far Rs 5 trillion has been returned or withdrawn on the lapse of various facilities on their due dates. “The extraordinary liquidity measures undertaken in the wake of the pandemic, combined with the liquidity injected through various other operations of the RBI have left a liquidity overhang of the order of Rs 8.5 trillion in the system,” the governor said.

“The RBI will engage in a gradual and calibrated withdrawal of this liquidity over a multi-year time frame in a non-disruptive manner beginning this year. The objective is to restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of monetary policy,” Das said.

“While doing so, I would like to reiterate our commitment to ensure the availability of adequate liquidity to meet the productive requirements of the economy. We also remain focussed on completion of the borrowing programme of the Government and towards this end the RBI will deploy various instruments as warranted,” he added.