RBI policy review: Interest rates on hold yet again and other key takeaways

The Reserve Bank of India (RBI) on Thursday kept the benchmark repo and reverse repo rates unchanged, and said that the Indian economy could see a real growth rate of 7.8% in 2022-23. 

This is the tenth consecutive time that the central bank has chosen not to tinker with the benchmark rates in its bi-monthly monetary policy review. The repo rate will remain at 4% while the reverse repo rate will be at 3.35%.

The RBI had last changed the repo rate on May 22, 2020, just as the country was beginning to come out of a national lockdown that had halted nearly all economic activity. 

Key takeaways:

1) RBI governor Shaktikanta Das says India is expected to grow at the fastest pace in the world.

2) RBI maintains consumer price inflation forecast of 5.3% for 2021-22.

3) RBI reduces the inflation target to 4.5% for 2022-23.

4) RBI forecasts Q1FY23 CPI at 4.9%, Q2 at 5%, Q3 at 4% and Q4 at 4.2%. 

5) RBI increases limit for inflows under the Voluntary Retention Scheme to Rs 2.5 trillion from Rs 1.5 trillion. Move will provide additional sources of capital for domestic debt markets, including government securities.

6) RBI says variable rate repo operations of varying tenors will be conducted as warranted by liquidity conditions.

7) From March 1, fixed-rate reverse repo and marginal standing facility windows will be available only from 5.30 pm to 11:59 pm.

8) RBI enhances the cap on e-rupee vouchers from Rs 10,000 to Rs 1 lakh. These vouchers can now be used more than once. The e-rupee was launched last year by the NPCI.

What more did the RBI say?

Explaining the rationalise behind keeping rates unchanged, Das said the RBI has made an “effort to limit disruption to economic activity” and that “continued policy support is warranted for durable, broad-based recovery”.

“While CPI (consumer price index) edged higher, it is along expected lines. Core inflation remains elevated and headline inflation is expected to peak in Q4FY22, and turn moderate in H2FY23,” Das said. 

Das also said the consumer price inflation was in line with expectations and that food prices easing adds to the optimism. However, he added that hardening crude oil prices is a “major upside risk”.

“Transmission of costs remains muted on slack in demand. Banks should strengthen governance and risk management,” he said. 

How has the bond market reacted to the RBI monetary policy?

The 10-year bond yields have taken a hit and declined to 6.735%.

What about the stock market?

Benchmark stock indices roses after the policy announcement. The 30-stock BSE Sensex was trading 0.7% higher at 58,881 around 11:15 AM.