In its Apr-22 policy, RBI has set the ball rolling with a formal commencement of monetary policy normalization.
Download ReportApr-22 RBI policy Ready to pivot
In its Apr-22 policy, RBI has set the ball rolling with a formal commencement of monetary policy normalization. It did though with an interesting twist. We had been expecting the reversion to the pre-pandemic design of monetary policy framework, characterized by restoration of the LAF corridor to 50 bps. RBI did restore the corridor, not via the anticipated hike in reverse repo rate (in two tranches) but in a one-sweep move by introducing a new tool of Standing Deposit Facility (SDF) at 3.75% to serve as the floor rate. As such, the LAF corridor has been restored at 50 bps to the pre pandemic configuration. The reverse repo and repo stand unchanged at 3.35% and 4.0% respectively; with the latter getting ensconced by the SDF and MSF symmetrically on the two ends. The former i.e., the reverse repo rate as a monetary policy instrument becomes defunct for now. The RBI also decided unanimously to retain the accommodative stance while focusing on “withdrawal of accommodation” to ensure that inflation remains within the target going forward, while supporting growth. This in our view, sets the course for a change in stance to neutral in Jun-22 and initiate repo rate hike of a cumulative 50 bps over Aug-22 and Mar-23; beginning as early as in Aug-22.