RBI Press Release

April 8, 2022 statement,mentioned the tectonic shifts in Europe triggered by the conflict, which had generated new difficulties for global development and monetary policy conduct. Shortages, instability in commodity and financial markets, supply dislocations, and, most disturbingly, persistent and spreading inflationary pressures are getting more intense with each passing day as the war progresses and sanctions and punitive actions become more severe. In the developing world, debt hardship is increasing as a result of capital outflows and currency depreciation. Recent GDP data indicates that the global economic recovery is slowing.

The Monetary Policy Committee’s Decisions and Deliberations

In light of this, the Monetary Policy Committee (MPC) has agreed to hold an off-cycle meeting on the 2nd and 4th of May 2022 to examine the evolving inflation-growth dynamics and their implications following the MPC meeting on April 6-8, 2022. The MPC unanimously decided to raise the policy repo rate by 40 basis points to 4.40 percent, with immediate effect, based on this assessment of the current condition and forecast. As a result, the standing deposit facility (SDF) rate has been adjusted to 4.15 percent, while the marginal standing facility (MSF) rate has been adjusted to 4.65 percent, and the Bank Rate has been adjusted to 4.65 percent. The MPC also unanimously resolved to keep accommodating policies in place while focusing on removing them in order to keep inflation within the target range in the future while promoting expansion

I’d like to now explain the reasoning behind the MPC’s decision and stance. Inflation is rising rapidly and dramatically over the world. Geopolitical tensions are driving up inflation in major economies to levels not seen in the last three to four decades, while curbing external demand. Crude oil prices around the world are hovering around US$ 100 per barrel and remain erratic. In March, global food prices reached a new high, and they have continued to rise since then. Due to the turmoil in Europe and export bans by important producers, inflation-sensitive products relevant to India, such as edible oils, are in limited supply.

In India, the rise in fertiliser and other input costs has a direct impact on food prices. Furthermore, monetary policy normalisation in major advanced economies is projected to accelerate rapidly — both in terms of rate hikes and the unwinding of quantitative easing, as well as the implementation of quantitative tightening. Emerging economies, such as India, would be negatively affected by these events. COVID-19 infections and lockdowns in major global production centres, on the other hand, are expected to exacerbate global supply chain bottlenecks while stifling growth. In fact, global growth forecasts for this calendar year have been lowered down by up to 100 basis points. These developments put India’s inflation trajectory, as spelt forth in the MPC resolution of April 2022, in jeopardy.

Growth and Inflation Prospects

Growth

It is useful to take stock of home macroeconomic and financial situations in this high-voltage global environment. The recovery in domestic economic activity that began with the Omicron wave’s fading is proving to be increasingly broad-based. On the heels of recovering contact-intensive services and increased discretionary spending, private consumption is regaining traction. The projection for a normal southwest monsoon for the fourth year in a row in 2022 has improved agricultural prospects, which could boost rural spending. In addition, there are hints of a nascent rebound in the investment cycle. High-frequency indicators such as imports and capital goods production, growing capacity utilisation supported by favourable financial circumstances, and improved corporate balance sheets all reflect this.Export growth has been strong, but non-oil non-gold import growth has remained strong, indicating a long-term recovery in domestic demand.

Even as domestic economic drivers become more powerful, global spillovers such as protracted and intensifying geopolitical tensions; elevated commodity prices; COVID-19-related lockdowns or restrictions in some major economies; slowing external demand; and tightening global financial conditions as a result of monetary policy normalisation in advanced economies all pose challenges. These dangers are progressing along the lines predicted in the April 2022 announcement, and they appear to be lasting.

Inflation

The significant acceleration in headline CPI inflation to 7% in March 2022 was driven mostly by food inflation as a result of negative spillovers from historically high global food prices. In March, nine of the twelve food sub-groups had an increase in inflation. The continuance of food price pressures is indicated by high frequency price indicators for April. Simultaneously, the immediate impact of rises in domestic petroleum product pump prices, which began in the second fortnight of March, is filtering into core inflation figures and is projected to have picked up in April.

Inflationary pressures on food are anticipated to persist in the future.The Food and Agriculture Organisation (FAO) and the World Bank’s food price indexes both hit new highs in March and are still rising. Domestic prices are being impacted by spillovers from global wheat shortages, despite ample domestic supply. Due to export limitations by key producing countries and the loss of sunflower oil production due to the war, edible oil prices may rise even further. Feed cost increases are leading to price increases in chicken, milk, and dairy products. International crude oil prices are still hovering around US$ 100 per barrel, causing domestic pump costs to rise.

Financial Market Conditions and Liquidity

Several liquidity management measures, including the restoration of a symmetric LAF corridor around the policy repo rate and the creation of the standing deposit facility, were implemented in April in response to the shift in monetary policy stance (SDF). These policies put the priority placed on preserving price stability while keeping the goal of expansion in mind. Inflation persistence must be broken, and inflation expectations must be re-anchored, according to monetary policy. With the pandemic fading and the continuous broadening of expansion as economic activity regains and surpasses pre-pandemic levels, headroom for this realignment of priorities is becoming available.

To enable complete and effective transmission to the rest of the economy, liquidity circumstances must be regulated in accordance with policy action and position. Liquidity in the financial sector has been stable since the policy announcement in April. During April 8-29, 2022, the average surplus liquidity in the banking sector – as measured by total absorption through SDF and variable rate reverse repo (VRRR) auctions – was 7.5 lakh crore. The weighted average call money rate (WACR) – the operating aim of monetary policy – has dipped below the SDF rate due to a considerable liquidity overhang in the form of daily surplus funds parked under the SDF (average of 2.0 lakh crore from April 8-29, 2022).

Conclusion

The last two years have been a narrative of our tenacious fight against the pandemic and, more recently, the war. We rose to the occasion to protect the economy and financial system from a tidal wave of shocks.We’ve reached a fork in the path once more. The RBI is committed in its resolve to keep inflation under control and foster growth. In order to keep the Indian economy on track for long-term, inclusive growth, inflation must be controlled. Our efforts to ensure price stability will have the greatest impact on overall macroeconomic and financial stability, as well as long-term growth.