RBI keeps repo rate unchanged; check GDP outlook, liquidity measures and more

RBI Monetary Policy

RBI Monetary Policy: In its latest bi-monthly Monetary Policy meet held today, the central bank has kept the repo rate unchanged at 4%. Here are the major highlights:

RBI Monetary Policy: Repo Rate unchanged

  • The Reserve Bank of India kept the repo rate unchanged at 4% and the reverse repo rate unchanged at 3.35%. Repo rate is the rate at which the RBI lends to commercial banks, and reverse repo is the rate at which it borrows from them. 
  • RBI has held the key repo rate at record lows since May 2020 and reiterated time and again that it will remain supportive of growth.
  • The committee decided to continue with its accommodative stance as long as necessary to support growth and keep inflation within the target.

RBI Policy today: Update on inflation 

  • The RBI has projected CPI inflation at 5.3% for the ongoing fiscal 2021-22 and 4.5% for the next financial year 2022-23.
  • It is expected to moderate closer to the 4% target in the second half of FY23 and provide room for monetary policy to remain accommodative.
  • Due to an increase in food price, the retail inflation rose to a five-month high of 5.59% in December from 4.91% in November.
  • MPC has been given the mandate to maintain annual inflation at 4% until March 31, 2026, with an upper tolerance of 6% and a lower tolerance of 2%.

RBI Monetary Policy 2022: GDP growth update

  • The MPC has decided to continue with an accommodative stance to revive and sustain growth on a durable basis.
  • The RBI has projected the real GDP growth for the next financial year at 7.8%
  • The committee added that the real GDP growth of 9.2% in the current fiscal will take the economy above the pre-pandemic level.

RBI Policy: E-Rupi Digital voucher

  • e-RUPI is a digital voucher launched in August 2021 for digital dissemination of benefits under government schemes.
  • Currently, the limit on it was Rs 10,000. Now, the cap on each voucher will be hiked by 10 times from Rs 10,000 to Rs 1 lakh for both state and central government issuances.
  • The Governor has also proposed that the voucher can now be used multiple times until the entire Rs 1 lakh limit is used. Currently, it can be used only once for one specific purpose.
  • e-RUPI was developed by the National Payments Corporation of India (NPCI) which also handles payments instruments like the Unified Payments Interface (UPI), RuPay, and Bharat Bill Payment System (BBPS). 

RBI Monetary Policy: Update on cryptocurrency and CBDC

  • As far as cryptocurrencies are concerned, the RBI’s stance is very clear. It sees private cryptocurrencies as a big threat to financial and macroeconomic stability. They will undermine RBI's ability to deal with issues related to financial stability. 
  • RBI Governor said, "I think it is my duty to tell investors that what they are investing in cryptocurrencies, they should keep in mind that they are investing at their own risk."
  • He reminded investors to keep in mind that these cryptocurrencies have no underlying asset. 
  • RBI is not working with any external agencies when it comes to the CBDC (Central Bank Digital Currency). They are working with the CBDCs in their own ecosystem. Any decision to engage with any other agencies will be taken later.
  • RBI is open to trying out all possible technologies for CBDC. It depends on the use case. So it won't be one or the other. RBI does not have a timeline for CBDC.

RBI MPC: Other updates

  • Given the positive response to the VRR (Voluntary Retention Route) as evident from the near exhaustion of the current limit, the committee has proposed to increase the investment limit under VRR by Rs 1,00,000 crore to Rs 2,50,000 crore with effect from April 1, 2022.  
  • The committee has decided to allow banks in India to undertake transactions in the offshore Foreign Currency Settled Overnight Indexed Swap (FCS-OIS) market with non-residents and other market makers. It will provide a further fillip to the interest rate derivative market in the country.
  • It has proposed to increase the NACH mandate limit to Rs 3 crore from Rs 1 crore earlier. for settlements.

RBI Policy: INDmoney Analysis

  •  The status quo on policy rates comes as a relief to the bond markets, which had been under pressure following the fiscal stimulus measures announced during Budget 2022. The bond yields had been on a rise after gross market borrowing forecasted by Budget 2022 came in higher than the market expectations. 
  • RBI’s inflation forecast has also been benign. This should provide a further relief to bond market participants. The 1–year bond yield fell nearly 100 bps to 6.731%. 
  • The decision to maintain the repo rate by the RBI was in line with street expectations. CPI inflation within the RBI band for the last few months has lent further comfort. 
  • Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the volatility.
  • Stick to AAA-rated low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future. 
  • The interest rates are expected to bottom out and move higher over the next 3-6 months. Shorter duration funds are likely to outperform in this scenario, given their lower sensitivity to interest rate changes as compared to long-duration funds.