As Geopolitical Tensions Rise, RBI Trims Growth, Raises Inflation Estimates

Growth forecasts has been cut to 7.2% from 7.8%, while inflation outlook has been raised to 5.7% from 4.5%

The Reserve Bank of India (RBI) on Friday raised its outlook on inflation and cut growth estimates, due to geopolitical tensions. This statement made by RBI Governor Shakitkanta Das was his first bi-monthly monetary policy address since the onset of the military conflict between Russia and Ukraine on February 24, and his statement shows that it has played a role in determining India's monetary policy outlook.

"Since the MPC's last meeting in early February 2022, the expected positive benefits from the ebbing Omicron wave have been offset by the sharp escalation in geopolitical tensions. This has significantly changed the external and domestic landscape", Das said.

Subsequently, real gross domestic product (GDP) growth is projected at 7.2% for the ongoing financial year (FY2023), down from 7.8% that was projected in the February address. Das cited financial uncertainty in advanced economies, renewed COVID-19 resurgence in some countries and the global supply chain shock.

Growth will be 16.2% in the first quarter, 6.2% in the second quarter, 4.1% in the third quarter and 4% in the fourth quarter.

However, a noteworthy revision came in inflation outlook of the RBI, being revised upwards from 4.5% in February to 5.7%. This pressure is coming on the food front, where food supply disruptions could add to food price pressure, and from international commodity and oil prices.

However, the RBI said, any such estimates on growth and inflation is fraught with risk due to the excessive volatility in oil prices and geopolitical developments.

Rates left unchanged

The RBI left key rates unchanged.

It also maintained an 'accommodative' stance, though Das mentioned focusing the withdrawal of this accommodation to keep inflation in change. This is widely believed to be precursor to a subsequent shift to a 'neutral' stance, and raising interest rates in the future.

The policy repo rate, also called the repurchase rate, stays unchanged at 4%.It is the rate at which the RBI lends to banks on a short-term basis. The reverse repo rate, or the rate at which banks keep their funds with the RBI on a short-term basis, remains at 3.35% The Marginal Standing Facility and the bank rate stay unchanged at 4.25%

Reverting to pre-COVID monetary policy

In an indication that the RBI was going back to pre-COVID monetary policy operations, it announced that it was restoring the width of the liquidity adjustment facility (LAF) to 50 basis points. The LAF is the tool which guides the short-term monetary stability operation of the RBI.

The lower band or the floor of the corridor will now be provided by the new Standing Deposit Facility (SDF), which will the be 25 basis points below the repo rate (at 3.75%). The SDF is the rate at which the RBI can borrow from banks overnight without providing securities.

The upper end of the corridor is the marginal standing facility at 4.25%, and is the rate at which the RBI lends to banks overnight (and thus the LAF corridor is 50 basis points, which is MSF's 4.25- the SDF's 3.75).

The policy repo rate at 4% is at its centre.

Therefore, the lower end of the LAF corridor is absorptive as the RBI is borrowing funds from the banking system, while the upper end is injective, as the RBI is lending to the financial system.

The RBI also proposed that cardless cash withdrawals through ATMs be made interoperable through the Unified Payments Interface (UPI). This would prevent the need for physical cards and reduced card related fraud.

It also said that it would be releasing a paper on climate financing, and that it has proposed a committee that will examine the quality of customer service provided by all the entities regulated by it.

The statement can be seen here.

Also Read: Explained: Sri Lanka's Foreign Exchange And Economic Crisis


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