RBI finally takes course-correction; Baby’s feet begin to normalize

He did not use the word ‘generalisation’. But the impact of the new permanent deposit facility, on which banks can park their surplus funds (without collateral) with the central bank at 3.75%, as against the reverse repo rate of 3.35%, while the marginal standing facility (MSF) has been Placed at 4.25. % As the upper end of the new Liquidity Adjustment Facility (LAF) corridor, marks the beginning of the ‘normalization’ process. This is because the LAF width has now reduced to its pre-Covid level of 50 basis points (down from 65 basis points), indicating a return, though gradually, in the pre-Covid scenario.

Of course, one could argue that the reduction in the LAF corridor, as well as Governor Das’s more nuanced statement, are small steps given the dramatic turnaround in RBI’s projections for the growth versus inflation trade-off. The growth forecast has come down from 7.8% to 7.2%, while the inflation forecast has been raised to 5.7% from 4.5%.

The MPC’s statement this time is far more guarded than the one in February 2022: “The MPC unanimously decided to remain focused (emphasis added) on the return of housing to ensure that inflation remains within the target, supporting development”. There was no mention of “return of housing” then. In contrast, the RBI’s position then was that “further guidance of accommodative stance” would be maintained “as long as necessary to revive and sustain growth on a sustainable basis and continue to mitigate the impact of COVID-19 on the economy”. while ensuring that inflation remains within the target going forward.”

In the gobledgook world of the central bank, many may also see this as a significant change from the central bank that has been notorious for changing its language over the past several meetings.

Presumably, the tectonic shift in the macroeconomic scenario left the RBI with few options. Remember, the risk is high. The US Fed is expected to announce a much higher Fed rate hike (50 basis points) at its upcoming meeting in May than was previously anticipated and will initiate a more aggressive withdrawal of liquidity. At the same time, oil and other commodity prices will remain high as the war continues in Europe.

Given the increase in RBI’s inflation projections is much higher than the decrease in its growth projections, perhaps, there was really no option but to initiate a course correction. Several observers were pointing out this, including Mint Snapview. RBI had decided to ignore it. Until now. Improvement in capacity utilization, from 68.3% to 72.4%, as well as improved external sector strength would have given the RBI the courage to effect a much-needed change in priorities.

Going forward, now that it has recognized the need to correct for its previous focus on growth at the expense of higher inflation, the RBI should in its efforts bring average (rather than point-to-point) inflation back to mid- The point of its target range – four percent.

Needless to say, as with any course correction, there will be some pain. The returns on risk-free government securities will increase and with it, interest rates will rise across the spectrum. Both the government (which has an ambitious lending target for the first six months of the fiscal year beginning April 1) and other borrowers will have to pay higher rates of interest, while depositors, who have been facing negative real rates for a long time, will Is kept. There will be interest, profit on their savings.