Adjusted for inflation, policy rate still remains accommodative, says RBI Governor

7 December, 2022 | Vaishali Sharma

RBI governor Shaktikanta Das National

The Monetary Policy Committee (MPC) voted to raise the policy repo rate by 35 basis points to 6.25 percent with immediate effect at its last meeting on Wednesday.

The Monetary Policy Committee (MPC) voted to raise the policy repo rate by 35 basis points to 6.25 percent with immediate effect at its last meeting on Wednesday, according to RBI Governor Shaktikanta Das.

The repo rate is the interest rate at which the Reserve Bank of India loans to commercial banks. As a result, the RBI Governor stated that the standing deposit facility (SDF) rate has been reduced to 6%, and the marginal standing facility (MSF) rate and bank rate have been reduced to 6.50%.

In terms of monetary policy, the Governor stated that the MPC takes a comprehensive perspective of the policy rate and liquidity conditions in relation to inflation. After accounting for inflation, the policy rate remains accommodating.

The MPC also resolved, by a vote of four out of six, to keep the focus on withdrawing accommodation in order to keep inflation within the goal while supporting growth.

The Governor expanded on the MPC’s reasons for these policy rate and stance choices. Global growth prospects are dimming, he said, adding that financial markets remain jittery, with excessive volatility and price fluctuations.

Shaktikanta Das said for the Indian economy, the outlook is supported by good progress of rabi-sowing, sustained urban demand, improving rural demand, a pick-up in manufacturing, rebound in services and robust credit expansion. “Consumer price inflation moderated to 6.8 per cent (y-o-y) in October as expected, but it still remains above the upper tolerance band of the target. Core inflation is exhibiting stickiness.”

Overall, he stated that the MPC believes that additional calibrated monetary policy action is required to anchor inflation expectations, break core inflation persistence, and manage second-round impacts. These initiatives will improve the Indian economy’s medium-term development prospects. As a result, the MPC agreed to raise interest rates while remaining focused on the withdrawal of accommodation while supporting growth.

Over the next 12 months, the Governor said inflation is expected to remain higher than the 4 per cent target. “System liquidity remains in surplus with an average daily absorption under the liquidity adjustment facility (LAF) of Rs 1.6 lakh crore in November 2022. Since then, it has gone up to Rs 2.6 lakh crore as on 5th December,” he added.

He said that the overall monetary and liquidity conditions remained accommodative and hence, the MPC decided to remain focused on the withdrawal of accommodation.

According to the latest data released by National Statistical Office (NSO), real gross domestic product (GDP) posted a growth of 6.3 per cent year-on-year (y-o-y) in Q2:2022-23, driven primarily by private consumption and investment. This is in line with our expectations.

The governor also said investment activity will get support from government capex, going ahead. A pick-up in the share of fixed assets in total assets of manufacturing companies was visible in the first half of the year (H1).

He said according to surveys, consumer confidence has improved further. Manufacturing and infrastructure sector firms are optimistic about the business outlook. Services sector firms also expect activity to expand.

In an interconnected world, the Governor said the country cannot remain entirely decoupled from adverse spillovers from the global slowdown and its negative impact on our net exports and overall economic activity. “The biggest risks to the outlook continue to be the headwinds emanating from protracted geopolitical tensions, global slowdown and tightening of global financial conditions,” he added.

In his summary, he said GDP growth in India remains resilient and inflation is expected to moderate; but the battle against inflation is not over and added pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain.

While being watchful of the impact of our earlier monetary policy actions, the Governor said the central bank will keep “Arjuna’s eye” on the evolving inflation dynamics and be ready to act as may be necessary.

“Our actions will be nimble and in the best interest of the economy. The aspect of growth will obviously be kept in mind,” he said.

An accommodating approach indicates that the central bank is willing to extend the money supply in order to stimulate economic development. For the previous two years, the RBI has maintained an accommodating approach in order to sustain the economy throughout the COVID-19 crisis.