RBI says inflation to moderate in FY23 as it keeps rates unchanged

Against market expectations of a hike in the reverse repo rate, the Reserve Bank of India on Thursday left all key interest rates unchanged and reiterated its support to economic growth amid the COVID-19 crisis.

The repo and the reverse repo rates were left unchanged at 4 per cent and 3.35 per cent, respectively, while the accommodative stance of monetary policy was retained.

While the RBI’s six-member Monetary Policy Committee decided unanimously to keep the repo rate unchanged, the decision to retain the accommodative stance met with dissent from external member Jayanth Verma.


Following the outcome, domestic benchmark indices rebounded sharply. BSE Sensex was trading 419 points or 0.72 per cent higher at 58,885 while its counterpart NSE Nifty was up 109 points or 0.63 per cent at 17,554.

Government bonds too rallied, with yield on the 10-year benchmark 6.54 per cent 2032 paper dropping as much as seven basis points to 6.73 per cent. Bond prices and yields move inversely.

An ET poll had predicted a hike in the reverse repo rate of 15-40 basis points as hardening inflationary pressures, both domestic and global, were seen putting pressure on the RBI to normalise monetary policy.

The reverse repo rate has dictated the overnight cost of funds in the banking system for more than two years amid a huge surplus of liquidity maintained by the RBI.

The central bank has, however, over the past few months nudged overnight money market rates closer to the policy repo rate through the cutoffs set at its variable rate reverse repo auctions.

While acknowledging inflationary risks, RBI Governor Shaktikanta Das reiterated on Thursday that the central bank was committed to helping economic growth recover sustainably from the damage wreaked by the coronavirus crisis.

“The possible hike in fixed reverse repo was a close call and it seems the RBI gauged that markets need to be assuaged over material tightening of financial conditions ahead as global dynamics change and decided to stay put,” Madhavi Arora, Lead Economist, Emkay Global Financial Services said.

“The gradualist approach toward liquidity and rate normalisation may be challenged by various global and domestic push-and-pull factors.”

In a statement that was welcomed by markets, Das emphasised that it was necessary to continue providing policy support in order to bring about a “durable” growth recovery.

The governor said that the RBI estimates India’s GDP growth at 7.8 per cent in the next financial year, lower than the projection of 8-8.5 per cent provided by the government’s Economic Survey.

Das acknowledged risks to growth emanating from external factors including global central bank monetary policy responses to hardening inflation, the evolving nature of the COVID-19 virus as well as elevated crude oil prices.

On the inflation front, the RBI Governor said that the increase in Consumer Price Index-based inflation in December and a likely rise toward the upper tolerance band – 6 per cent –in January were primarily attributable to unfavourable base effects.

According to the governor, inflation is likely to moderate towards the RBI’s target in the second half of the next financial year and that the expected softening would provide room for policy support.

Consequently, CPI inflation is seen at 4.5 per cent in the next financial year, Das said, pegging the price gauge at 4.9 per cent in April-June, 5 per cent in July-September, 4 per cent in October-December and 4.2 per cent in January-March.