The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) unanimously decided on April 8 to hold the policy repo rate at 4%, based on an assessment of the macroeconomic condition and forecast. “The MPC also unanimously decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the goal going forward while supporting GDP,” RBI governor Shaktikanta Das said.
The bank rate and the marginal standing facility (MSF) rate both continue at 4.25 percent. The RBI has also decided to return the width of the Liquidity Adjustment Facility (LAF) corridor to 50 basis points, as it was prior to the pandemic.
“The newly instituted standing deposit facility (SDF), which will be set 25 basis points below the repo rate, i.e. at 3.75 percent, will now supply the floor of the corridor,” he stated. The predicted positive benefits from the ebbing Omicron wave have been outweighed by the sudden escalation in geopolitical tensions, he said, explaining the MPC’s rationale for its policy rate and stance decision.
RBI forecasts Inflation
“The external and home landscapes have been drastically altered as a result of this. Given the significant share of the two economies engaged in war in global production and exports of key commodities like oil and natural gas; wheat and corn; palladium, aluminum, and nickel; edible oils; and fertilizers, concerns about long-term supply disruptions have rattled global commodity and financial markets. Despite some retracement, global crude oil prices momentarily reached US$ 130 per barrel, reaching their highest level since 2008, and remain volatile at higher levels,” RBI governor Shaktikanta Das added.
“Global food costs have risen dramatically, as have metal and other commodity prices. Emerging market economies (EMEs) have seen an increase in risk aversion, resulting in massive capital outflows and a weakening trend in their currencies. These developments have ratcheted up global inflation estimates, which were already substantially above objectives in major nations, and will have a significant negative impact on output across geographies,” RBI governor Shaktikanta Das said.
He said global supply chain disruptions and input cost pressures are now expected to last even longer, citing the fact that geopolitical tensions have worsened at a time when the global economy is grappling with a sharp rise in inflation and consequent monetary policy normalization in major advanced economies.
“The recurrence of COVID-19 infections in certain key markets in March, as well as the resulting lockdowns, have the potential to exacerbate global supply constraints and input cost pressures.” He predicted that “world trade and output, and so external demand, will be weaker than expected two months ago.”
Overall, he said, recent external developments have resulted in the materialization of downside risks to the domestic growth outlook and upside risks to inflation predictions outlined in the February MPC resolution. Inflation is now expected to be higher, and growth is expected to be lower than predicted in February. He said that, while economic activity is improving, it is still just slightly over pre-pandemic levels.
As the horizon brightened, the governor noted, “escalating geopolitical tensions have put a shadow on our economic prospects.” Under these conditions, Mr. Das forecasts real GDP growth of 7.2 percent in 2022-23, with 16.2 percent in Q1, 6.2 percent in Q2, 4.1 percent in Q3, and 4.0 percent in Q4, assuming crude oil (Indian basket) at US$ 100 a barrel in 2022-23. Inflation is expected to be 5.7 percent in 2022-23, with 6.3 percent in Q1, 5.8 percent in Q2, 5.4 percent in Q3, and 5.1 percent in Q4.
“We are confronted with fresh but enormous issues — shortages in critical commodities; fractures in the international financial system; and worries of deglobalization,” he said in his opening remarks. Commodity and financial markets are characterized by extreme volatility.”
“While the pandemic quickly evolved from a health crisis to a life-and-death situation, the European war has the potential to disrupt the global economy.” We must be cautious but proactive in minimizing the negative impact on India’s economy, inflation, and financial conditions as we are caught in the cross-current of many headwinds,” RBI governor Shaktikanta Das added.
“However, we are heartened by the robust buffers that we have established over the last few years, which include huge foreign exchange reserves, significant improvement in external sector indicators, and substantial financial sector strengthening, all of which would enable us to weather this storm.” “Once again, we at the RBI are firm and ready to defend the economy and navigate our way out of the current storm,” he added.