What were the highlights of the RBI monetary policy announced on 08th April? What is your opinion about RBI not raising rates?

This was an important monetary policy as the markets were keen to see how the RBI reacted to the hawkish tone of Fed. The dilemma for the RBI was; whether to turn hawkish or risk monetary divergence. It finally opted for the latter. Despite the geopolitical risk of the Russia-Ukraine war, high oil prices and a horribly hawkish Fed, RBI decided on status quo. Here are some of the key highlights of the Apr-22 monetary policy.

· The repo rate was maintained at 4%; reiterating RBI’s commitment to growth even at the cost of monetary policy divergence. Reverse repo rates were also held at 3.35%.

· As a result, the bank rate and Marginal Standing Facility (MSF) rate, which are derived rates, stood at 4.25%. RBI is keep to keep rates low to encourage full-fledged recovery.

· RBI reduced the estimate for FY23 GDP growth by 60 basis points from 7.8% to 7.2%. Fortunately, RBI also raised CPI inflation target for FY23 from 4.5% to 5.7%.

· All the 6 MPC members voted unanimously to hold repo rates at 4% to keep it growth supportive. All members, including JR Varma, voted for an accommodative stance.

That brings me to the second part of your question about the logic of RBI not raising rates. We hope the outcome is favourable. It is surprising that RBI opted to maintain status quo on rates and also refused to abandon the accommodative stance. RBI is willing to risk monetary divergence hoping growth will compensate. Incidentally, the US will raise rates by 200 bps in 2022 and also unwind $95 billion of bond portfolio each month from May 2022. RBI has to be careful to ensure this does not trigger capital outflows or run on the rupee.