(Reuters) – The Reserve Bank of India’s key lending rate was held steady at record lows on Thursday, but it surprised markets by leaving its key deposit rate unchanged against some economists’ predictions of a hike to re-align it with short-term money market rates.
The monetary policy committee held the lending rate, or the repo rate, at 4%. The reverse repo rate, or the key borrowing rate, was also kept unchanged at 3.35%.
The MPC voted unanimously to maintain the status quo on the repo rate and by a majority of 5-1 to retain the accommodative policy stance.
Respondents in a Feb. 2-4 Reuters poll were closely split on the timing of the repo rate rise, with slightly more than half, 17 of 32, expecting a 25-basis point increase to 4.25% in April.
COMMENTARY
RADHIKA RAO, ECONOMIST, DBS BANK, SINGAPORE
“The policy communique was predominantly dovish, with the central bank opting to keep rates unchanged, effectively seeing through firm inflation in the March 2022 quarter, and expecting a pullback towards the mid-point of the target range in FY23.”
“The absence of broad-based recovery further strengthened their resolve to maintain status quo. The central bank expects the economy to weather global volatility and spillover risks, courtesy the healthy reserves coverage ratios, narrow current account deficit and steady foreign investment flows, suggesting that domestic policy has the room to lag the hawkish pivot amongst the Western central banks.”
AURODEEP NANDI, ECONOMIST & VICE PRESIDENT, NOMURA, MUMBAI
“Sometimes markets expect dessert, but then realise that the main course is still not over. “
“The RBI surprised by not only doubling down on its now familiar orthodoxy of keeping rates and stance unchanged, but also expressed a very dovish outlook for inflation for FY23, forecasting it at 4.5%.”
“This comes despite higher oil and commodity prices, growth-supporting fiscal policy, continued economic normalisation, and a distinctly hawkish Federal Reserve. This suggests that the RBI is likely to remain behind the curve, until macro circumstances warrant a shift of gears.”
PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI
“The MPC kept policy rates and its accommodative stance unchanged, which is a surprise compared to market and our expectations that the central bank would signal an exit with a modest reverse repo rate hike and change in language to gradual withdrawal of accommodation.”
“The government and the RBI are projecting weaker inflation and commodity prices in 2022 as global central banks unwind QE, which they hope will provide room to remain accommodative. We still see 10-year government bond rising to 7.5% by year end because of credit risk appetite improving and/or risk premiums rising, as markets anticipate faster policy rate hikes down the road.”
SANDEEP BAGLA, CHIEF EXECUTIVE OFFICER, TRUST MUTUAL FUND, MUMBAI
“Economics is all about making choices. RBI has chosen to prioritise growth over inflation. Given the expansionary budget, high oil prices, and elevated inflationary expectations, market players were expecting the beginning of the rate hike cycle in India. In the US, economists are expecting the U.S. Fed to raise rates between 5 to 7 times this calendar year.”
“By keeping all key rates unchanged, RBI has displayed confidence that India can remain isolated from global monetary trends. RBI’s average expectation of inflation at 4.5% in the FY22-23 is interesting. Bond yields should remain low given that they had risen in expectations of rate cycle reversal. RBI’s status quo is a brave step, which could lead to an unpredictable reaction from the investor community in the longer run.”
SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI
“It would have been opportune to start policy normalization with atleast a 20 bps hike in reverse repo without much of market impact. However, today’s policy risks sharper adjustments if inflation risks materialise.”
“Inflation risks, especially from fuel prices, remain a concern and can materialize relatively soon. Compared with RBI estimates, we estimate FY2023 GDP growth 30 bps higher at 8.1% and FY2023 CPI inflation 50 bps higher at 5%. We believe it would be opportune to increase reverse repo rate hike by 40 bps in the April policy.”
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SHARES & STOCK BROKERS, MUMBAI
“The RBI remained more concerned on growth versus inflation, and thereby maintained all the policy rates. The monetary policy stance also remains accommodative. We think that the RBI had at least the space to do a symbolic 15 bps reverse repo hike so as to signal rate normalisation, commitment to be at the top of the inflationary situation and also keep the Indian monetary policy in alignment with the global trend.”
“We expect the rate hike to start in the next MPC meeting. The stance of monetary policy, however, is likely to continue as accommodative.”
MADHAVI ARORA, LEAD ECONOMIST, EMKAY GLOBAL FINANCIAL SERVICES, MUMBAI
“The MPC expectedly kept the key rates unchanged unanimously and reiterated its accommodative stance both on rates and liquidity… The possible hike in fixed reverse repo was a close call and it seems the RBI gauged that markets need to be assuaged over material tightening of financial conditions ahead as global dynamics change and decided to stay put.”
“The gradualist approach toward liquidity and rate normalization may be challenged by various global and domestic push-and-pull factors.”
SAKSHI GUPTA, SENIOR ECONOMIST, HDFC BANK, GURUGRAM
“A dovish policy… The central bank continued to emphasize its approach of liquidity normalisation through its shift from fixed to variable rate window.”
“The somewhat comfortable inflation trajectory provides RBI space to withdraw monetary support only gradually and reduces the need of any sudden tightening actions.”
“We expect the RBI to support growth and raise the repo rate only by the August policy once there are greater signs of a more even recovery.”
“More importantly, looking ahead, the smooth passage of the borrowing program and the management of the yield curve remains key. The central bank did not commit to any specific actions in this regard in this policy, athough we expect it to continue with operation twists to put a cap on yields in FY23.”
KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU
“The RBI kept the stance as accommodative to be able to continue to provide policy support on a durable basis.”
“Importantly, RBI projected FY22-23 real GDP growth of 7.8%, much less than the official expectation of between 8.0% and 8.5%. While still higher than our estimate of 7.0%, it does indicate a circumspect central bank and the willingness of the RBI to err on the side of caution.”
“There is, therefore, a possibility that RBI would make every possible attempt to not hike the policy rate in April but push it further to June, though it would still be in line with our expectation of a hike in Q2 22.”
“Also, given that the expectation of inflation peaking by Q421 (similar to ours) may provide some comfort to the central bank. That said, we feel that continuing to ignore inflationary pressure for long will come at a cost and the central bank may eventually have to opt for a more aggressive tightening going forward, thereby by clamping down growth prospects.”
GARIMA KAPOOR, ECONOMIST – INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI
“Facing a tough choice between policy rate normalisation amid sticky inflation and global tightening of financial conditions and limiting the increase in yields amid record high government borrowing programme for FY23, in line with our expectations, the MPC retained both policy repo and reverse repo rate and also maintained accommodative stance to support growth on a durable basis.”
“The recent stress in the bond market, comfort on medium term inflation outlook and need to address uneven domestic growth seem to have prompted the decision. We now expect RBI to hike reverse repo rate in Q1FY23 followed by a repo rate hike in Q3FY23.”
PARTH NYATI, FOUNDER, TRADINGO, MUMBAI
“There were expectations that the RBI may hike the reverse repo rate and may change its stance to neutral from accommodative in tandem with hawkish global central banks amid rising inflation but it continued with its existing stance.”
“The RBI believes that inflation will peak out soon and there is a need for continuous support to the economy. Generally, it is considered positive for the market but it will be important to see how the market will read it because there could be a risk that the RBI will remain behind the curve that may cause inflation in the future.”
RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI
“By staying pat on policy rates and keeping the stance at accommodative, the MPC is trying to avoid a knee-jerk reaction in the fixed income markets. This may help banks to avoid huge mark to market losses at the quarter end.”
“Market participants are already moving towards normalisation following the signals coming from the global economy and the actions of the global central banks. However, today’s monetary policy announcement will provide a short term relief to the market sentiment.”
(Reporting by Chris Thomas, Anuron Kumar Mitra, Nallur Sethuraman, Rama Venkat and Chandini Monnappa in Bengaluru and Abhirup Roy in Mumbai; Editing by Rashmi Aich)
