RBI Governor Shaktikanta Daso Announced the unanimous decision of the six-member monetary policy committee (MPC) to put rates on hold for the 11th time in a row, citing the uncertainties arising out of the war in Europe. Repo (rate at which RBI lends to banks) and reverse repo (rate at which it borrows from banks) remain at 4% and 3.35% respectively. Das, however, raised the floor for money market rates by introducing a permanent deposit facility (another window where the RBI allows banks to park money with it) at 3.75%.
With credit taking off in the third quarter, RBI’s moves to infuse liquidity could lead to a hike in deposit rates in two months. However, home loan rates will not rise as they are directly linked to the repo rate, which acts as an external benchmark for banks.
While the impact of the pandemic on the economy is waning, the new risk is war in Europe. “Two years later, as we exit the pandemic situation, the global economy has seen a tectonic shift, with the outbreak of war in Europe from February 24, with sanctions and escalating geopolitical tensions,” Das said.
Economists called the policy adamant and said bond yields would rise, which would increase the cost of funds. “In order of priorities, we have put inflation ahead of growth as we thought the timing was appropriate,” Das said. He said though the stance remained accommodative, the RBI is gradually taking back the accommodation.
“As the repo rate remains unchanged, bank loans linked to the repo rate will not be affected, and the governor has assured adequate liquidity,” said AK Goel, MD and CEO, Punjab National Bank and president of the Indian Banks Association. Goyal said the RBI has extended the rationalization of risk weights for individual housing loans till March 2023, which will encourage banks to lend more for housing.
Elaborating on RBI’s stand, Das said that there is an output gap in the economy. “The capacity utilization has improved from the last quarter. It was 68.3 and now it is 72.4. Even with the 8.9% growth estimate, private consumption and fixed investment are at 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 status of customer service in RBI-regulated entities, the adequacy of customer service rules, and suggest measures for improvement.
“While inflation has the potential to surprise upwards against RBI’s projections, the growth process is improving,” said SBI Group chief economist. Soumya Kanti Daso,