RBI keeps repo rate unchanged and launches SDF to absorb excess liquidity

At its meeting, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to keep the repo rate under the Liquidity Adjustment Facility (LAF) unchanged at 4.0%. Consequently, the Marginal Standing Facility (MSF) and the Bank Rate remain unchanged at 4.25%. The standing deposit facility (SDF) rate, which will now be the floor of the LAF corridor, will be 3.75%, RBI said in a statement today.

RBI said it would also remain accommodative while focusing on withdrawing accommodation to ensure inflation remains on target going forward, while supporting growth.

Simultaneously, RBI also announced the activation of the Permanent Deposit Facility (SDF), which will help the central bank absorb liquidity (deposits) from commercial banks without giving government securities back to the banks. The SDF will be the basic tool for absorbing excess liquidity under the new monetary policy.

These decisions, according to RBI, are in line with the objective of achieving the medium-term consumer price index (CPI) inflation target of 4% within a range of +/- 2%, while supporting growth.

At a time when most central banks in major economies have raised interest rates, the Reserve Bank of India has decided to maintain the status quo on policy rates, paving the way for cheaper interest on home loans.

RBI said lower interest rates on home loans will continue for now and announced an extension of the pandemic-related easing that facilitates lower interest rates for home loans with a ratio 1 year high loan/value

The central bank has extended by one year until March 31, 2023 the lower risk weight allowed for individual home loans with a high loan-to-value ratio. -value ratios (LTV) for all new sanctioned housing loans until March 31, 2022,” RBI Governor Shaktikanta Das said in his statement.

Given that the RBI has left the repo rate – the external benchmark that most banks use to price their retail floating rate loans – unchanged in its monetary policy resolution, banks will not raise, for l currently, interest rates for variable rate mortgage loans sanctioned after October 1, 2019, when the external benchmarking regime came into effect.

RBI noted that since the MPC meeting in February 2022, the global economic and financial environment has deteriorated with escalating geopolitical conflicts and accompanying sanctions. Commodity prices rose significantly across the board amid heightened volatility, with negative spillovers to net commodity importers. Financial markets showed increased volatility. Crude oil prices hit their highest level in 14 years in early March; and despite some corrections, they remain volatile at high levels. Supply chain pressures, which were expected to ease, are rising again.

Several central banks, especially systemic ones, continue to be on the path to normalizing and tightening monetary policy guidance. As a result, sovereign bond yields in major emerging economies have tightened. Bullion prices had hit near-2020 highs on safe-haven inflows, with a recent correction as bond yields rose. Global stock markets fell, although they have recently regained ground. In recent weeks, strong capital outflows from EMEs have moderated, limiting downward pressure on their currencies, even as the US dollar has strengthened. Overall, the global economy is facing major headwinds on several fronts, including continued uncertainty about the trajectory of the pandemic.

Domestically, RBI noted that the Second Advance Estimates (SAE) for 2021-22 released by the National Statistics Office (NSO) on February 28, 2022 placed India’s real gross domestic product (GDP) growth at 8.9%, 1.8% above the pre-pandemic level (2019-20). On the supply side, real gross value added (GVA) grew by 8.3% in 2021-22, with its main components, including services, exceeding pre-pandemic levels. GDP growth in Q3:2021-22 slowed to 5.4%.

RBI said high-frequency indicators available for the fourth quarter of 2021-22 showed signs of recovery with the rapid ebb of the third wave, but the picture is mixed. Urban demand reflected in domestic air traffic rebounded in March and the pace of contraction in passenger vehicle sales slowed in February. By contrast, rural demand reflected in sales of two-wheelers and tractors contracted in February. Imports of capital goods rose sharply in February, although domestic production continued to contract. Merchandise exports remained buoyant and recorded double-digit growth for the thirteenth consecutive month in March 2022 and reached $417.8 billion in 2021-22, surpassing the target of $400 billion. However, all categories of imports grew even faster, resulting in a merchandise trade deficit at a record annual level of $192 billion in 2021-22, or 6.1% of GDP.

On the supply side, foodgrain production hit a new high in 2021-22, with kharif and rabi production exceeding final estimates for 2020-21 as well as targets set for 2021-22. The manufacturing PMI remained in expansion territory in March, although it moderated somewhat to 54.0 from 54.9 in February. Service sector indicators – rail freight; electronic transport invoices; GST collections; tolls; fuel consumption; and electricity demand – were expanding in February-March. The services PMI continued to expand, rising to 53.6 in March from 51.8 the previous month.

Headline CPI inflation edged up to 6.0% in January 2022 and 6.1% in February, exceeding the upper tolerance threshold. The pick-up in food inflation contributed the most to headline inflation, with inflation for cereals, vegetables, spices and protein-based food items like eggs, meat and fish being the main drivers. Fuel inflation moderated due to continued electricity deflation and stable LPG prices. Core inflation, i.e. CPI inflation excluding food and fuel, remained elevated, although there was some moderation from 6.0% in January to 5.8% in February, mainly due to slowing inflation.

According to RBI, overall liquidity in the system remained largely in excess, with average daily absorption (through fixed rate and floating rate repos) under the LAF at Rs7.5 lakh crore in March, slightly lower. at Rs7.8 lakh crore in Jan-Feb 2022. Base money (adjusted for the initial impact of the change in cash reserve ratio) increased by 10.9% (year-on-year) on 1 April 2022 Money supply (M3) and bank credit from commercial banks increased (year-on-year) by 8.7% and 9.6%, respectively, as of March 25, 2022. India’s foreign exchange reserves increased by $30.3 billion to reach $607.3 billion in 2021-22.

Looking ahead, RBI said, the trajectory of inflation will critically depend on geopolitical developments and their impact on global commodity prices and logistics. Domestic grain prices have risen in line with international prices, although record foodgrain production and buffer stock levels should prevent a spike in domestic prices. Severe global price pressures on major food commodities such as edible oils and animal and poultry feeds due to global supply shortages lend great uncertainty to the outlook for food prices, warranting continued monitoring.