India cbank holds rates but starts to rein in loose policy as inflation risks rise

The Reserve Bank of India kept its key lending rate at a record low on Friday, as expected, but said it will turn its focus to battling inflation as the Russia-Ukraine crisis pushes crucial commodity prices to near-record highs.

In a surprise move, the central bank also said it would restore a liquidity adjustment tool to pre-crisis levels, which was seen as a first step to moving away from the ultra-loose monetary policy embraced during the COVID-19 pandemic.

But with global risks rising, RBI Governor Shaktikanta Das said the process of returning policy settings to more normal levels would be gradual.

“The conflict in Europe has the potential to derail the global economy caught in the crosscurrent of multiple headwinds. Our approach needs to be cautious, but proactive in mitigating the adverse impact on India’s growth and inflation,” Das said after the policy decision.

The RBI’s monetary policy committee held the lending rate, or the repo rate (INREPO=ECI), at 4per cent. The reverse repo rate (INRREP=ECI), or the key borrowing rate, was also kept unchanged at 3.35per cent.

However, the central bank said it would restore the width of the liquidity adjustment facility corridor to 50 basis points.

RBI said the floor of the corridor would be the standing deposit facility rate, which was set at 3.75per cent, and the marginal standing facility rate at 4.25per cent will be the upper bound with the repo rate in between the two.

“The hawkish turn by the RBI was warranted and it is likely that central bank will change its stance to neutral in the coming policy (meeting) followed by a repo rate hike sooner than earlier expected,” said Sakshi Gupta, senior economist at HDFC Bank.

All but six of 50 respondents polled by Reuters between March 29-April 5 forecast no change in the repo rate on Friday. Thirty-two had expected rates to still be unchanged by end-June.

Reflecting growing uncertainties, the RBI raised its inflation forecast for the current fiscal year to 5.7per cent, 120 basis points above its forecast in February, and cut its economic growth forecast to 7.2per cent for 2022/23 from 7.8per cent earlier.