India Monetary Policy April 2022

India: Reserve Bank of India keeps rates unchanged in April

At its monetary policy meeting ending on 8 April, the Reserve Bank of India (RBI) kept its policy rates unchanged. The RBI left the reverse repurchase rate, the repurchase rate and the marginal standing facility rate at 3.35%, 4.00% and 4.25%, respectively. That being said, the Bank decided to restore its liquidity adjustment facility corridor to 50 basis points, in line with its pre-pandemic levels. The slightly hawkish move to adjust its corridor signals its desire to move away from its ultra-loose policy.

The Bank decided that the current accommodative lending rates remained necessary to support the ongoing recovery in economic activity. Domestic demand showed some signs of improvement in recent months, but the war in Ukraine is causing massive uncertainty in commodity and financial markets and could derail the global economic recovery. Meanwhile, inflation has remained elevated in recent months, while a combination of higher commodity prices and renewed supply chain disruptions poses a further threat to the inflation outlook ahead. This led the Bank to restore its corridor to 50 basis points in a bid to gradually reduce its monetary stimulus levels.

In its communiqué, the RBI reiterated that it is “braced up and prepared to defend the Indian economy with all instruments at its command”. The majority of panelists see rates rising this fiscal year as the manufacturing and services sectors improve, leaving the Bank with more room to tame price levels.

Commenting on the outlook for monetary policy, analysts at Nomura noted:

“Given the significant amount of policy catch up that lies ahead, the RBI steering away from giving any clear forward guidance this time and as monetary policy works with long lags, we do not see a choreographed exit (stance change first, then repo hikes). […] We expect policy repo rate hikes to begin from June. We maintain our call for 25 basis point repo rate hikes in all consequent four policy meetings, i.e. a 100 basis point hike cumulatively in 2022. With the RBI now clearly signalling a move towards a positive real policy rate, we are adding 50 basis points more in hikes in H1 2023, taking the repo rate to 5.50% by mid-2023.”

The next meeting is scheduled for 6–8 June.

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