The credit policy packs several surprises: Business Line 11th Feb 2022

 The credit policy has provided some pleasant surprises for the market which includes banks. The first is that there has been no change in any of the policy rates.

An increase was expected in the reverse repo rate to move it closer to the 3.75 per cent mark which would be a reversion to the 25 bps corridor between the repo rate and the reverse repo rate.

The RBI has stated quite clearly that since it has been using the VRRR to absorb surplus liquidity the weighted average return on these funds has increased from 3.37 per cent in August to 3.87 per cent of late which means that surpluses are already being rewarded with a better rate. This has obviated the need to increase reverse repo rate.

The second is that while it was expected that the RBI, like the Fed, would talk about how the surplus liquidity would be tackled, the policy had clearly stated that from now on the VRR and VRRR would be the tools used to manage liquidity. This is a change from the overnight auctions which till the time of the pandemic were the main tools used to manage liquidity. Therefore instead of focusing on rolling back liquidity, attention has shifted to managing the same.

Third, the RBI has made a projection of 7.8 per cent in GDP growth for FY23. Normally a call is taken in the April policy but considering the Economic Survey’s growth projections of 8-8.5 per cent which were reiterated by the Finance Ministry in the Budget, the RBI view is important.

Now, the RBI has said that the basis for this projection is really investment. There are hopes that the private sector investment cycle will take shape as capacity utilisation rates have also improved of late. The big push given by the government on capex will help to push growth.

Consumption blues

However, it is less bullish on consumption which it believes is trailing. This actually can also be traced to the employment issue which existed even before the pandemic.

The number on its own may not be very significant but the scenario has been described by the RBI as not indicating durability as yet. And durability is important because as long as growth is not firm, the view taken since 2020 is that the policy has to be accommodative.

The fourth is that the stance has been maintained as being accommodative, which was expected. The surprise element is that the MPC has indicated that this stance would remain for FY23 too which is against the present groupthink which believes that there would be at least two hikes in the repo rate cumulating to 50 bps.

Fifth has been the view on inflation. The projection of 4.5 per cent has been very aggressive in the downward direction. The central bank evidently believes that the price shocks today in oil are temporary and would normalise soon. Also pass through of higher input prices may not materialise this year as demand conditions are still weak.

While these are fairly strong assumptions, a sub-optimal monsoon and persistent geopolitical tension on the oil front can upset calculations. This is probably the only factor that can offer a counter surprise for the central bank.

On the whole, the policy has given guidance for stability in policy and continued support for growth while facilitating the government borrowing programme.