Reuters – The Reserve Bank of India said on Friday it is starting to move away from its ultra-loose monetary policy even as it kept its key lending rate at a record low, as its priorities shifted to fighting surging inflation in the wake of the Russia-Ukraine war.
In a surprise move, the central bank said it would restore its liquidity adjustment facility corridor to pre-crisis levels, which was seen as a first step to moving away from emergency measures embraced during the COVID-19 pandemic.
Analysts and traders are now broadly expecting the RBI to change its ‘accomodative’ stance to neutral at its next policy meeting in June, with interest rate increases starting sooner rather than later.
But with global growth risks also rising, RBI Governor Shaktikanta Das sought to reassure financial markets that the process of returning policy settings to more normal levels would be gradual.
“The conflict in Europe has the potential to derail the global economy caught in the crosscurrent of multiple headwinds. Our approach needs to be cautious, but proactive in mitigating the adverse impact on India’s growth and inflation,” Das said after the policy decision.
The RBI’s monetary policy committee held the lending rate, or the repo rate (INREPO=ECI), at 4%. The reverse repo rate (INRREP=ECI), or the key borrowing rate, was also kept unchanged at 3.35%.
However, the central bank said it would restore the width of the liquidity adjustment facility corridor to 50 basis points.
RBI said the floor of the corridor would be the standing deposit facility rate, which was set at 3.75%, and the marginal standing facility rate at 4.25% will be the upper bound with the repo rate in between the two.
“This raises the probability of rate hike cycle commencing in August, while not fully precluding the case for a June hike itself along with a stance change if macro realities worsen for the inflation outlook,” said Madhavi Arora, lead economist at Emkay Global.
All but six of 50 respondents polled by Reuters between March 29-April 5 had forecast no change in the repo rate on Friday. Thirty-two had expected rates to still be unchanged by end-June.
