In its first bi-monthly review of monetary policy for the fiscal year FY23 held between Apr 6-8, 2022, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has maintained the repo rate at 4.00%, in line with market expectations. The decision was backed by complete unanimity with a 6-0 voting outturn.
Besides the prolonged status quo on repo rate, Acuité anticipated the RBI to restore the width of the policy corridor (Liquidity Adjustment Facility) back to its pre pandemic level of 50 bps via a 20 bps hike in the reverse repo rate in a two-step process spread over Apr-Jun 2022.
Acuité is pleased to share a detailed analysis on RBI MPC April'22.
Growth: The RBI revised lower its estimate for FY23 GDP growth to 7.2% from 7.8% provided earlier in Feb-22. On a quarterly basis, the central bank projected GDP growth at 16.2% in Q1, 6.2% in Q2, 4.1% in Q3 and 4.0% in Q4, as a favorable base exaggerates growth in H1 vis-à-vis H2. The RBI expects support to growth from factors like good prospects for rabi output, expanding vaccination coverage, pick-up in contact intensive sectors, budgetary thrust on public capex, and rollout of manufacturing incentives in the form of PLI Scheme. However, these growth drivers are expected to be partly offset with downside risks emanating from sharp escalation in geopolitical uncertainty and the accompanying surge in global commodity prices, tightening of global financial conditions, persistence of supply side disruptions, and the expected moderation in external demand.
This is fairly consistent with Acuité's forecast of FY23 GDP growth of 7.5% with downside risks.
Inflation: While RBI derives comfort on food inflation from record high rabi harvest along with prospects of a normal monsoon in FY23, it expects additional pressure on prices of pulses, edible oils, and fertilizers due to the conflict in Ukraine. This is over and above the primary inflation risk accruing from the sharp surge in crude oil prices along with its steady passthrough to the retail consumers over the last 2-3 weeks. Expectedly, the RBI has now revised its FY23 inflation forecast sharply upwards from 4.5% in Feb-22 policy meeting to 5.7%, on the assumption of crude oil averaging at USD 100 pb in FY23. On a quarterly basis, it estimates CPI inflation at 6.3% in Q1, 5.8% in Q2, 5.4% in Q3 and 5.1% in Q4.We, however, attach a mild upward bias to RBI's inflation forecast given the low likelihood of any material cool down in crude oil and other commodity prices within a short period. Accordingly, Acuité expects inflation to average at 5.9% in FY23. With inflation risks now getting skewed sharply upwards, RBI Governor acknowledged that controlling inflation was a higher priority for the MPC as compared to growth, in its post policy meeting conference.