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India Central Bank Holds Key Rates; Restores LAF Corridor

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India’s central bank left its key interest rates unchanged, as widely expected, on Friday and introduced the Standing Deposit Facility to absorb the excess liquidity.

At the first bi-monthly meeting of the financial year, the Monetary Policy Committee of the Reserve Bank of India, led by Governor Shaktikanta Das, unanimously decided to retain the policy repo rate at 4.00 percent. The reverse repo rate was left unchanged at 3.35 percent.

The last change in the policy rate was in May 2020, when the repo rate was reduced by 40 basis points.

The marginal standing facility rate and the bank rate were also maintained at 4.25 percent.

The MPC unanimously decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
The committee observed that the escalation of the geopolitical situation and the accompanying surge in international crude oil and other commodity prices, tightening of global financial conditions, persistence of supply-side disruptions and significantly weaker external demand pose downside risks to the outlook.

Also, the future course of the pandemic and the uncertainties about the pace of monetary policy normalization in major advanced economies weigh on the outlook.

The central bank today downgraded its growth outlook for the fiscal year 2022-23 to 7.2 percent from 7.8 percent.

In February, consumer price inflation at 6.07 percent, breached the central bank’s upper end of the target range.

With the broad-based surge in prices of key industrial inputs and global supply chain disruptions, input cost push pressures appear likely to persist for longer than expected earlier, RBI said.
Their pass-through to retail prices, though limited till now given the continuing slack in the economy, needs to be monitored carefully.
The RBI upgraded its inflation forecast for the current fiscal year to 5.7 percent from 4.5 percent.

Further, the central bank restored the width of the Liquidity Adjustment Facility corridor to 50 basis points, the position that prevailed before the pandemic.

The newly instituted standing deposit facility, or SDF, which will be placed 25 basis points below the repo rate, will act as the floor of the corridor. The MSF rate will continue to be 25 basis points above the repo rate.

As a result, the width of the LAF corridor was restored to the pre-pandemic configuration of 50 basis points.

The fixed rate reverse repo rate was retained at 3.35 percent. It will remain as part of RBI’s toolkit and its operation will be at the discretion of the RBI for purposes specified from time to time, the bank said.

The new liquidity framework indicates a less accommodative policy stance, Shilan Shah, an economist at Capital Economics, said.

But with inflation likely to be higher than the MPC expects, further tightening steps will need to be taken and the repo rate will be hiked before long, the economist noted.

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