RBI’s Maintains Accommodative Monetary Policy – Repo Rates Remains Unchanged

• Domestic recovery must be supported rigorously through all policy avenues according to the MPC.
• The policy repo rate has remained at 4%, unchanged by the RBI.
• Major advanced economies (AEs) quickened the pace of unwinding of their ultra-accommodative monetary

Reserve Bank of India in its MPC meeting has kept the benchmark interest rates unchanged to back growth. According to RBI Monetary Policy Report, Real gross domestic product (GDP) rose by 8.9 per cent in 2021-22, above its pre-pandemic (2019-20) level by just 1.8 per cent.

Brent crude prices crossed US$ 130 per barrel on March 8, 2022 and have hovered in the US$ 100-120 range since mid-March, posing the biggest risk to India’s economic prospects and putting the global recovery at heightened risk. The Bloomberg commodity index spiked by around 10 per cent since the war erupted on February 24 and 52 per cent on a year-on-year basis (as on April 5, 2022) as supply concerns exacerbated across commodities. Gold prices crossed US$ 2,000 per ounce on safe haven demand before some correction. Global food prices were at an all-time high in February 2022 and are expected to harden further in view of potential supply disruptions.

Economic activity was recovering from the ebbing of the Omicron wave when the fallout of the Ukraine-Russia conflict has overcast the near-term outlook with heightened uncertainties. Growth and inflation outcomes are at high risk across the world as well as in India.

The escalation of war, continued supply chain disruptions, global financial market volatility emanating from monetary policy normalisation in major advanced economies and the evolving COVID-19 trajectory pose downside risks to growth and upside risks to the inflation outlook and could get exacerbated significantly by the intensification of geopolitical tensions.

Domestic financial markets have moved broadly in sync with the accommodative monetary policy stance. The rebalancing of liquidity from the fixed rate window to variable rate reverse repo auctions is firming up money market rates. Bond yields have risen from historic lows on the back of higher crude oil prices and the expected monetary policy normalization by advanced economy central banks. Nevertheless, financial conditions remain conducive to growth and credit offtake is gaining traction. The RBI’s market operations remain supportive of the recovery. Going forward, they will contextually factor in the developments in global financial and commodity markets, which are witnessing volatility due to worsening geopolitical situations and monetary policy normalization in the major Advance Economies, so as to insulate domestic financial markets from spillovers.

RBI has acknowledged the “tectonic shifts” caused by the ongoing Russia-Ukraine war. The Russia-Ukraine war and its ramifications for global growth, inflation and financial conditions have overwhelmed the global outlook. With increasing risks to growth and financial stability, policy authorities need to steer a knife-edge course to avoid a crash landing. Keeping in view all these factors RPI has kept policy Repo Rate @4% to revive and sustain the economic growth

Since the rates are unchanged for now RBI may go for an incremental increase in rates in the next monetary policy committees meeting.

Staff Galactik Views

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