Monetary Policy Reaction: Sakshi Gupta, Principal Economist, HDFC Bank

30 Sep 2022 , 12:59 PM

RBI raised the policy rate by 50 bps to 5.9% as expected, aligning itself to aggressive monetary tightening globally. Moreover, the rate move was in response to continued domestic inflationary risks and growth that broadly continues to hold up. The central bank kept its inflation forecast unchanged at 6.7% in FY23 while lowering its GDP growth forecast by 20 bps to 7% — the latter in response to the lower-than-expected Q1 GDP numbers.

The RBI kept its stance unchanged at “withdrawal of accommodation” justifying it by the fact that liquidity remains in surplus, and the policy rate trails behind the inflation rate. The central bank drew a comparison with 2019 when the stance was last neutral, and liquidity was in a deficit mode while the policy rate was higher than inflation — indirectly alluding to real positive rates in the economy.

On liquidity, the RBI continued to re-iterate that it would conduct fine tuning operations to manage liquidity conditions. The central bank could gradually move towards maintaining liquidity conditions that are consistent with the operating rate becoming the repo rate, implying further upside for short-term rates in the economy.

On the rupee, the RBI emphasized that their strategy would be focused on maintaining investor confidence and anchoring expectations and that their FX reserves remained comfortable, signaling that FX interventions are likely to continue and be focused towards defending any extreme volatility in the rupee.