RBI governor Shaktikanta Das announced the unanimous decision of the six-member monetary policy committee (MPC) to keep rates on hold for the 11th consecutive time, citing uncertainties arising out of the war in Europe. The repo (the rate at which the RBI lends to banks) and reverse repo (rate at which it borrows from banks) continue to be at 4% and 3. 35% respectively. Das, however, raised the floor for money market rates by introducing a standing deposit facility (another window where RBI allows banks to park funds with it) at 3. 75%.
With credit picking up in the third quarter, RBI’s moves to drain liquidity could lead to an increase in deposit rates in two months. However, home loan rates will not rise as these are directly linked to the repo rate, which serves as an external benchmark for banks.
While the impact of the pandemic on the economy is waning, the new risk is the war in Europe. “Two years later, as we were emerging out of the pandemic situation, the global economy has seen tectonic shifts beginning February 24, with the commencement of the war in Europe, followed by sanctions and escalating geopolitical tensions,” said Das.
Economists termed the policy as hawkish and said that bond yields would rise, translating into an increase in the cost of funds. “In the sequence of priorities, we have put inflation before growth because we thought that the time is appropriate,” said Das. He added that while the stance continued to be accommodative, the RBI is gradually withdrawing the accommodation.
“Since the repo rate is unchanged, bank loans linked to repo rate will not be affected, and the governor has assured of sufficient liquidity,” said A K Goel, MD & CEO of Punjab National Bank & chairman of the Indian Banks’ Association. Goel added that the RBI has extended until March 2023 the rationalisation of risk weightage for individual housing loans, which will encourage banks to lend more for housing.
Explaining the RBI’s stance, Das said that there continues to be an output gap in the economy. “The capacity utilisation has improved from the previous quarter. It was 68. 3 and now it is 72. 4. Even with the 8. 9% growth estimate, private consumption and fixed investments are only 1. 2% and 2. 6% respectively — above their pre-pandemic levels,” said Das.
As part of the policy measures, Das also announced a committee to examine and review the current state of customer service in RBI-regulated entities, adequacy of customer service regulations and suggest measures to improve the same.
“While inflation does have the potential to surprise on the upside vis-a-vis RBI projections, growth remains a recovery in process,” said SBI Group chief economist Soumya Kanti Das.