Finally, RBI changes, its posture

by Janaki Samant

The RBI, in its monetary policy statement announced on 8 April 2022, kept the policy repo rate unchanged at 4 per cent and continued with its accommodative stance.

Though on the face of it nothing changed, the RBI has managed a complete about-turn when compared to its ‘super-dovish’ February 2022 monetary policy announcement, in almost all respects. Its tone has turned quite hawkish. In addition, some policy changes indicate a faster move towards policy repo rate hike.

The RBI introduced the ‘standing deposit facility (SDF)’, which is now the floor for its liquidity adjustment facility (LAF) corridor. It de-facto replaces the fixed rate reverse repo (FRRR) which remains unchanged at 3.35 per cent. The FRRR is rendered redundant. The SDF rate has been fixed at 3.75 per cent. So, in a way the RBI has hiked the reverse repo rate by 40 basis points.

Marginal Standing Facility (MSF) rate, the ceiling for the LAF corridor, remained unchanged at 4.25 per cent. With this, the LAF corridor of 50 basis points was reinstated after a gap of two years.

The SDF is an overnight deposit facility for banks to park their deposits with RBI. Unlike reverse repo, it does not require any collateral in the form of government securities. It is a tool for the RBI to absorb excess liquidity from the system. The facility might be introduced for longer tenors as per the requirement of the RBI.

The RBI has been absorbing almost 80 per cent of the liquidity through the variable rate reverse repo (VRRR) at a rate close to the repo rate of 4 per cent. The introduction of SDF will improve returns for banks compared to that earned at the reverse repo rate.

An immediate reaction to this introduction of SDF was the sharp spike in the average yield of government securities with residual maturity of 10 years. From 6.91 per cent on 7 April, yield shot up to 7.02 per cent on 8 April and further to 7.16 per cent on 11 April. 10-year g-sec yield breached the 7 per cent mark after almost three years.

The RBI stated that the monetary policy committee unanimously agreed to continue with its accommodative stance, but its focus would be on withdrawal of accommodation. The RBI conceded that the liquidity overhang in the system was to the tune of Rs.8.5 trillion. The RBI would reduce it in a calibrated fashion over a multi-year time frame. As per some estimates, systemic liquidity needs to be reduced to around Rs.2.5-3.5 trillion.

RBI has fallen behind its counterparts in other countries in its efforts to tackle inflation. The US Federal Reserve hiked its benchmark interest rate by 25 basis points on 22 March 2022, its first such hike in two years. It is likely to hike rates six more times during the remaining period of 2022 to bring down inflation which is currently ruling at a 40-year high. Bank of England also hiked its bank rate by 25 basis points on 17 March 2022. Brazil’s central bank hiked its interest rate again in March which is now at a 5-year high.

These hikes, the spurt in inflation in recent months at home and current global developments indicating that inflation would continue to remain high, appear to have prompted the RBI to finally change its stance.

Retail inflation, based on consumer price index (CPI), is estimated to have remained above 6 per cent in the last quarter of 2021-22. The Russia-Ukraine war that has dragged on for more than one and a half month led to a further jolt to the already high global energy and commodity prices. Prices of steel, fertilisers, coal, edible oil have seen a sharp rise since the last week of February.

With the hostilities continuing in the Black Sea region, global commodity prices are likely to remain high driven by supply shortages. Consequently, the RBI’s views and outlook on inflation also changed dramatically. The target for inflation is 4 per cent within a band of +/- 2 per cent. As stated in the monetary policy statement, the RBI’s primary concern would now be to ensure that inflation remained within the band going forward, while supporting growth.

As high global prices of food, metals, crude oil and gas are likely to persist, the RBI hiked its inflation forecast for the 2022-23 fiscal year to 5.7 per cent from its last projection of 4.5 per cent announced in the February policy. Its first quarter forecast also expects inflation to cross six per cent.

The implications of the April monetary policy statement indicate that the hike in policy repo rate might not be as far away as was anticipated earlier.

Though the RBI has stated its intentions of withdrawing accommodation, it is likely to be a slow process. The RBI has announced the calendar for the central government’s borrowing programme during the first half of the 2022-23 fiscal year. Of the Rs.14.95 trillion of fresh borrowing that it has budgeted for the year, more than half of the borrowing of Rs.8.45 trillion, was planned for the first half. A reduction in liquidity at a time when the government is on a borrowing spree will lead to a tightening of yields and interest rates. The provision of a hike in the limit for keeping specified securities in the held-to-maturity (HTM) portfolio from 22 per cent to 23 per cent will provide more space for banks to support the large borrowing programme.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.3 -1.9
Consumer Sentiments Index
Base September-December 2015
69.5 +0.5
Consumer Expectations Index
Base September-December 2015
69.4 +0.4
Current Economic Conditions Index
Base September-December 2015
69.7 +0.7
Quarterly CapEx Aggregates
(Rs.trillion) Jun 21 Sep 21 Dec 21 Mar 22
New projects 2.89 3.14 3.46 4.89
Completed projects 0.73 1.28 2.76 1.05
Stalled projects 0.33 0.28 0.06 0.29
Revived projects 0.14 0.39 2.06 0.28
Implementation stalled projects 0.64 0.25 0.65 0.07
Updated on: 16 May 2022 3:28PM
Quarterly Financials of Listed Companies
(% change) Jun 21 Sep 21 Dec 21 Mar 22
All listed Companies
 Income 42.3 27.5 23.5 19.8
 Expenses 41.9 26.7 21.7 17.4
 Net profit 139.8 55.1 31.9 45.7
 PAT margin (%) 9.0 9.6 9.0 11.4
 Count of Cos. 4,556 4,677 4,690 905
Non-financial Companies
 Income 61.0 35.7 29.3 27.6
 Expenses 62.6 36.0 29.0 27.9
 Net profit 192.7 59.7 18.3 25.7
 PAT margin (%) 8.4 8.8 7.5 10.3
 Net fixed assets 4.9 -2.1
 Current assets 10.8 19.0
 Current liabilities 0.8 12.5
 Borrowings 12.1 7.1
 Reserves & surplus 12.4 9.5
 Count of Cos. 3,330 3,382 3,402 637
Numbers are net of P&E
Updated on: 16 May 2022 3:28PM
Annual Financials of All Companies
(% change) FY20 FY21 FY22
All Companies
 Income 0.5 -0.9 16.1
 Expenses 0.3 -3.3 16.7
 Net profit -4.9 72.5 24.3
 PAT margin (%) 2.0 4.5 12.3
 Assets 8.9 9.6 3.3
 Net worth 4.6 11.5 5.2
 RONW (%) 3.4 7.0 12.4
 Count of Cos. 32,202 29,546 46
Non-financial Companies
 Income -1.3 -2.0 16.2
 Expenses -1.0 -4.1 17.4
 Net profit -20.8 63.1 20.8
 PAT margin (%) 2.2 4.2 11.1
 Net fixed assets 11.2 1.3 8.5
 Net worth 2.2 10.4 8.3
 RONW (%) 4.7 8.0 15.8
 Debt / Equity (times) 1.2 1.0 0.1
 Interest cover (times) 1.9 2.5 26.6
 Net working capital cycle (days) 81 84 38
 Count of Cos. 25,551 23,301 36
Numbers are net of P&E
Updated on: 12 May 2022 7:22AM