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RBI’S OBJECTIVES

* The Monetary Policy Committee has highlighted rising inflation and is taking actions to achieve ‘the medium-term target for CPI inflation of 4% within a band of +/- 2 per cent, while supporting growth.’

* The RBI MPC has unanimously maintained its accommodative stance while focusing on imminent withdrawal of accommodative stance. It is likely to move into a neutral stance in upcoming announcements.

* RBI has given importance to inflation management over GDP growth rates as it does not want the economy to slow down drastically. RBI feels lower inflation is required to support macro economic stability and ensure durable growth in the economy.

* RBI’s support for the government’s borrowing program is expected to be incrementally lower in the coming months.

* This is balanced with an intention to remove excess liquidity from the system over a multi-year period.

* RBI is expected to take measures to smoothen upward movement of the yield curve.

RBI ACTIONS- OFF CYCLE MPC ANNOUNCEMENTS

* In its off-cycle meeting on 4 th May, the MPC Increase the policy repo rate under the liquidity adjustment facility (LAF) by 40 bps to 4.40% with immediate effect. This has effectively reversed the excessively accommodative stance taken during the Pandemic.

* Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15% and the marginal standing facility (MSF) rate and the Bank Rate to 4.65%.

* The CRR was raised by 50 bps from 4% to 4.50%. This is likely to drain Rs.0.9 trillion of excess liquidity from the system.

* There is increasing fiscal and monetary coordination between Government and RBI to control inflation. Government has cut petrol/ Diesel excise duty, levied export duty on steel, reduce duties on coal imports to zero. The government has banned the export of wheat now to make augment domestic supply and control food inflation.

RBI ACTIONS

* The government borrowing program for the financial year worth ~14.31 Lakh crores was announced, of which ~60% will be executed in the first half of FY23. The government wants to front load its capex due to its multiplier effect on the economy

* RBI will limit interventions in the market to control yields as such actions would be contradictory to their objective of reducing liquidity.

* RBI holds ~USD 50 billion of forward dollar purchases over the next 2 years, which gives it some independence to follow its own monetary policy. Current forex reserve is ~$592 billion.

* RBI is unlikely to aggressively reduce liquidity through forex, but with increasing volatility and Current Acct. Deficit, it may look to elongate the maturity of the swaps it holds. When a central banks takes an aggressive position to fight inflation through policies such as rate hikes, the currency tends to strengthen.

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