The Reserve Bank of India (RBI) on Wednesday kept borrowing costs at a record-low for the ninth consecutive time as it decided to continue supporting economic growth amid uncertainty over the impact of the Omicron strain of the coronavirus on the economy. 

The six-member Monetary Policy Committee (MPC), which has paused rate changes since August last year, unanimously decided to keep the benchmark repurchase rate at 4 per cent and voted 5-1 to retain its accommodative policy stance as long as is necessary, reflecting a continued bias to support economic growth given that inflation was not a big worry. The reverse repo rate — the level at which it absorbs excess cash from lenders — was kept unchanged at 3.35 per cent. 

It kept the GDP growth projections unchanged at 9.5 per cent for the current fiscal and retained the inflation forecast of 5.3 per cent for the full year.

How is how industry, experts reacted – Who said what:-

Madhavi Arora, Lead Economist, Emkay Global Financial Services.

“The MPC expectedly kept the key rates unchanged unanimously and reiterated its accommodative stance both on rates and liquidity. However, Prof Jayanth Varma’s possible dissent on continuation of accommodative stance for foreseeable future continues to keep MPC in split state. There were no material changes in growth and inflation outlook in near term. The focus was on communication on liquidity management key amid evolving market risks. As expected, the RBI did not opt for a reverse repo hike, and the policy is well used as a lever to prepare markets for a gradualist approach toward normalization through both communication and action. Liquidity repricing focus: The RBI reaffirmed longer tenor VRRRs as the preferred tools toward normalization amid current bumper liquidity surplus, especially as the redistribution/re-pricing of existing liquidity via VRRR tenor/quantum/cut-offs has smoothly helped the alignment of some money market rates toward the Repo rate.  Missed opportunity on SDF: The  overnight liquidity management CY22 onwards will happen through the auction route, making fixed overnight reverse repo irrelevant and thus making the Reverse repo floating. While this is welcome as far as liquidity repricing is concerned, we believe that SDF as a policy tool at the margin could have tried in this policy. The quantum of 14-day VRRRs for December calendar has been increased – going to Rs 7.5tn by end-Dec’21, while the governor stated higher tenor of 28-day or quantum would be used as per the need of the system. RBI to opt for gradual transition: In all, RBI will likely tread cautiously on market preparation. We do not rule out introduction of SDF as a tool at lower bound next year as Reverse repo becomes floating. In our view, the introduction of uncollateralized SDF could significantly enhance the central bank’s sterilization capacity, especially as the liquidity deluge dilemma will continue in the coming months as well. The journey from current Rs8.5tn+ system liquidity to a pre-Covid Rs2tn+ will be a long-drawn one, which could push RBI to explore new tools to manage durable liquidity/any idiosyncrasies amid collateral constraints under VRRRs.”

Rajiv Sabharwal, MD & CEO, Tata Capital Ltd

RBI maintains rate status quo and continues with the accommodative policy stance. The economy has gained growth momentum over the last 6 months, however RBI will want to further nurture a broad based recovery and will also aim at sustainability of the same. 
There is no upward change in the reverse repo rate as contrary to market anticipations. Also, at this juncture, RBI remains guarded against any adverse impact that may arise on account of the new Omicron Covid-19 variant.
Although inflation remains a concern, moderation of crude prices and the recent cut in excise duty will work in favour for the inflation trajectory. Also, Inflation is expected to be within the comfort corridor of the RBI.
Over the last 2 months, RBI has been using various tools that has helped absorb excess liquidity from the system. The market has taken cue of this passive approach adopted by the RBI to normalize liquidity and we have seen rates move up across the yield curve. Further, RBI has once again assured the markets that adequate systemic liquidity will be maintained to achieve growth and stability.

Divakar Vijayasarathy, Founder &  Managing Partner, DVS Advisors LLP
“The holding of rates by the MPC is on the expected lines but the statement by RBI Governor that growth is the priority indicates that RBI might continue to hold the rates even in the next review and beyond. The impact of new variant is a concern which would closely be followed and the inflation being within the range also facilitates being accommodative. Further, RBI expects inflation to peak in Q4 but ease thereafter. This observation also indicates that the RBI may not give a knee jerk reaction to increase in inflation and would continue to be accommodative. The growth projections for FY 22 was retained at 9.5% but with minor revisions for Q3 & Q4 numbers. It was also confirmed by MPC that excess liquidity would also be tackled in a nonabrasive manner. This also is expected to ease inflationary pressures.”

YS Chakravarti, MD & CEO, Shriram City Union Finance Ltd

“RBI keeping interest rates unchanged is supportive of growth. While green shoots are beginning to show, private consumption continues to be below the pre-COVID levels.  MSMEs have started stabilizing, and we expect MSMEs to bounce back in 2022. Spending will pick up at the middle and lower-income groups as COVID impact fades, and fuel tax cuts will likely aid purchasing power. Two-wheeler demand in rural India has been lagging and should gain momentum in 2022. Omicron poses a risk, if widespread lockdowns return, the outlook will alter substantially.”

Ram Raheja, Director at S Raheja Realty