The Reserve Bank of India’s (RBI’s) policy review this time was always going to be special for several reasons. First is that after the optimism revealed in the February policy, things are looking very different. Russia's war in Ukraine has been a new exogenous force. The budgetary numbers were being discussed even before the year started, which means skepticism came in earlier. The currency has been volatile, though tamed by RBI intervention. The US Fed has increased rates and is now certain on quantitative easing (QE) rollback, and inflation perspectives look quite menacing.
The monetary policy committee (MPC) has sprung some surprises even though the repo rate has been kept unchanged. The stance has been kept accommodative. However, there has been a change in commentary, which says that there will also be withdrawal of accommodation keeping in mind inflationary concerns. This may sound a bit ambivalent as the stance has not changed, but comes with a caveat. It is not surprising that the 10-year bond touched the 7 per cent mark as the RBI governor spoke. The advice has been on gradual withdrawal of liquidity, which means that there will be a case for calibrated tightening.
The other surprise is the restoration of the 50 basis points (bps) corridor in LAF, but this comes with the standing deposit facility that will be at 3.75 per cent, while the reverse repo is at 3.35 per cent. But given that 80 per cent liquidity is being absorbed at close to repo rate, the market has been prepared for this change.
The concept of SDF is interesting as it will perform the role of the overnight reverse repo. Under the new liquidity framework this would become the floor, while the MSF the ceiling. This will also mean that the overnight reverse repo window may no longer be the preference for banks, which would put their surplus funds in the SDF. The SDF has the advantage of not requiring the RBI to hold on to government securities which is needed in case of reverse repo.
What was on expected lines are the changes in forecasts on gross domestic product (GDP) and inflation. Here, the RBI has been quite aggressive, especially on growth, which is down at 7.2 per cent from 7.8 per cent after highlighting more strengths than weaknesses. This will have implications for the government’s budgetary numbers as growth was targeted at a higher rate.
For inflation, the RBI has again changed the view from 4.5 per cent to 5.7 per cent, which is quite reasonable given that Bank of Baroda’s view is 5.5 – 6 per cent. The assumption on oil price at $100 (for the Indian basket) again looks on the higher side, though justifiable today. The RBI has rightly pointed out that it is not just oil but several other commodities like fertilisers, metals, gas, wheat, corn which are witnessing very high growth in prices.
What does this foretell for the future? There is definitely a sign that interest rates will be raised and two repo rate hikes look very likely in the next two policies unless inflation comes down sharply, which looks unlikely. Banks have been given a cushion on the HTM front, which will help in this rising interest rate environment. This also means that both deposit and lending rates will move up, which is good news for savers, but not so much for borrowers. In short, the days of easy money are over.
No comments:
Post a Comment