The Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 4 percent in the final policy review of FY22. It also decided to continue with its accommodative stance as long as necessary to revive growth on a sustainable basis. MSF and bank rate were also maintained at 4.25 percent while the reverse repo rate was retained at 3.35 percent.
This was the tenth time in a row that the Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das has maintained the status quo. RBI had last revised its policy repo rate on May 22, 2020.
The RBI also projected GDP growth at 7.8 percent in FY23 and CPI at 4.5 percent in the coming financial year.
"The pandemic holds the world economy hostage once again. Containment measures are denting the pace of economic activity. With inflation at a multi-decadal high, the macro-environment is rendered highly uncertain," RBI Governor Shaktikanta Das said in his policy speech.
Das added that going forward, India is poised to grow at the fastest pace year-on-year among major economies as per projections by IMF. This recovery is supported by large-scale vaccination and sustained fiscal and monetary support.
The Indian markets as well as the experts seemed to be pretty satisfied with the February policy review. The stock markets were trading around 0.75 percent higher post the policy. The Nifty Bank and Nifty Fin Services indices jumped the most, up 1.3 and 1.4 percent lifting the benchmark indices.
Let's take a look at what the experts make of the first policy review of the calendar year 2022.
Geojit Financial Services
Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, "RBI has again voted for growth by continuing the accommodative stance and retaining the current repo and reverse repo rates. Even though this might invite criticism of the central bank being behind the curve, the RBI governor has categorically communicated that continued policy support is warranted for a durable and broad-based recovery. This clear pro-growth stance is desirable at the current juncture."
He further noted that the markets have responded positively to the policy as of now with banking stocks exhibiting strength, however added that the short to the medium-term trend of the market is likely to be influenced by the inflation data in the US expected late tonight.
Emkay Global Financial Services
Madhavi Arora, Lead Economist, Emkay Global Financial Services said, "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."
She further stated that the gradualist approach toward liquidity and rate normalization may be challenged by various global and domestic push-and-pull factors.
"We note the macro adjustment owing to changing global and domestic dynamics has so far been borne by the rates market while the FX market has been resilient. Amid ultra-elevated term premia, India’s current real rates look reasonable vs. EMs, given the present crosscurrents. This could give some leeway to the RBI to conduct shallow normalization," added Arora.
Nitin Shanbhag, Executive Group Vice President – Investment Products, Motilal Oswal Private Wealth said, "policy rates remaining unchanged indicates that RBI is more focused on domestic macro variables rather than tracking global central bank actions. While the US Fed has clearly indicated multiple rate hikes going forward to combat rising inflation, the RBI seems far more calibrated in approach given its own projection of domestic CPI peaking in Q4FY22 and moderating in FY23. On the external front, the projection of CAD at 2 percent of GDP is also positive."
"The outcome was more dovish than most economists expected. Though the intent of the RBI to support the recovery in the economy in the face of disruption due to the Omicron variant is commendable, economists will now fear whether the RBI will fall behind the curve, having maintained the easy monetary stance longer than most other Central Banks had," said Dhiraj Relli, MD & CEO, HDFC Securities.
He added that while equity markets may temporarily welcome this decision but they will be largely driven by the balance Q3 Corporate results, the outcome of state elections and changes in global risk appetite.