RBI did the right thing but scope for 0.5% increase in interest rate: Sunil Sinha

Published on : 09:50 PM Apr 08, 2022

“RBI in its monetary policy review on 8 April 2022 not only kept the repo rate at 4.0% but also stated that it will remain accommodative. These are in line with India Ratings and Research’s expectations. However, to balance the inflation growth dynamics RBI also stated that it will focus on withdrawal of accommodation in a way that inflation and inflationary expectation are anchored without hurting growth,” said Sunil Sinha, Principal Economist of India Ratings and Research, a Fitch Group rating agency.

New Delhi: The Reserve Bank of India has done the right thing by not increasing the interest rate and maintaining the accommodative stance in the first monetary policy announcement for the current financial year but there is a scope for an interest rate increase of half a percent this year as commodity prices are unlikely to come down to a pre-conflict level even if the Russia-Ukraine war ends, said a top economist.

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India’s central bank, the Reserve Bank of India, which manages the country’s monetary policy and sets in the benchmark interest rates such as repo and reverse repo rates, the rates at which banks borrow or park their money with the RBI, unchanged in the first monetary policy of the current financial year which started early this month

In addition to maintaining the benchmark interest rates, the Reserve Bank also maintained the accommodative policy stance. It means that the RBI will maintain enough liquidity in the financial system to support economic recovery. Advertisement

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“RBI in its monetary policy review on 8 April 2022 not only kept the repo rate at 4.0% but also stated that it will remain accommodative. These are in line with India Ratings and Research’s expectations. However, to balance the inflation growth dynamics RBI also stated that it will focus on withdrawal of accommodation in a way that inflation and inflationary expectation are anchored without hurting growth,” said Sunil Sinha, Principal Economist of India Ratings and Research, a Fitch Group rating agency.

Sinha says this is an indication that the accommodative policy stance of RBI may undergo a change in the near term if the situation warrants it.

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“Under the current situation, where the geopolitical situation and the global commodity prices are in a flux, India Ratings believes RBI has done the right thing to stay put on the policy rate and continue with the accommodative policy stance, but the agency also feels that there is a case of 50 basis points increase in the policy rates in FY23 because even if the Russia-Ukraine conflict ends the global commodity prices are unlikely to revert to the pre-conflict level plus the supply side disruption would take time to ease,” Sinha told ETV Bharat.

Commenting on the Reserve Bank’s decision to introduce a new tool, the Standing Deposit Facility, to better manage the interest rate and liquidity, Sinha says the much-expected correction of the LAF corridor has happened but with a twist as the bottom of the LAF corridor will now be known as Standing Deposit Facility (SDF) instead of a reverse repo.

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“Moreover, the functioning of the SDF will be similar to the MSF. This means that at both ends of the LAF corridor, there will be standing facilities – one to absorb and the other to inject liquidity and access to SDF and MSF will be at the discretion of banks, unlike repo and reverse repo rates, Open Market Operations OMO and (Cash Reserve Ratio) CRR which are available at the discretion of the RBI. The SDF rate is 3.75%, 25 bps below the repo rate,” noted the economist.

Downward revision of GDP growth

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The economist, who closely tracks macro-economic data and public finances, says the RBI’s decision to cut down the GDP growth forecast to 7.2% and upward revision of the retail inflation forecast is on the expected lines.

RBI governor Shaktikanta Das has projected the retail inflation for the current financial year ending in March next year to be at around 5.7%, within the target set for the RBI under the Reserve Bank of India Act.

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“Taking into account these factors and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US $100 per barrel, inflation is now projected at 5.7 percent in 2022-23, with Q1 at 6.3 percent; Q2 at 5.8 percent; Q3 at 5.4 percent; and Q4 at 5.1 percent,” Das had said in his monetary policy announcement.

Elaborating on the rationale behind the RBI’s decision, Sinha says these decisions clearly reflect the worsening of the geopolitical situation due to the Russia-Ukraine conflict and accompanying sanctions on Russia which have been impacting the entire world, including India.

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“The broad-based jump in global commodity prices and supply-side disruptions has put a new spanner in the wheel as the country was emerging out of the pandemic situation,” Sinha noted.

He says although it was still uncertain that how long this conflict will last, the ripple effect of the sanctions imposed on Russia and the devastation of the Ukrainian economy will be felt even after the conflict ends because of shortages in many key commodities, fractures in the international financial architecture, and fears of deglobalization among other things.

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Russia and Ukraine have a significant share in the global production and exports of key commodities such as oil and natural gas, wheat and corn, metals such as palladium, aluminum, and nickel, edible oils, and fertilizers.

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