The RBI and the MPC maintained status quo on all key rates as well as the policy stance.
Download ReportRBI Policy: Omicron risk delays policy normalisation
Gradually improving growth momentum, emergence of upside risk to inflation, and beginning of monetary policy normalization by key central banks had prompted the RBI to start calibrating the domestic liquidity surplus. The upward movement in money market rates in the last two months in response had prepared market participants for commencement of the interest rate normalization via an upward move in the reverse repo rate in Dec-21 policy review. However, the recent emergence of Omicron variant seems to have weighed upon policy deliberations with the central bank opting for retaining reverse repo rate at record low levels. We empathize with this viewpoint to an extent given unknown repercussions of Omicron’s virulence, it’s impact on vaccine efficacy and economic spill overs. Having said so, the ongoing transition of COVID from a pandemic to an endemic state is prompting behavioural changes in economic agents, who are now learning to live with the virus. As such, it is imperative to continue to signal the need for monetary policy normalization through implicit and explicit steps. Ongoing calibration of liquidity should get complemented with restoration of the width of the policy rate corridor via 40 bps upward adjustment in reverse repo rate. The central bank can consider achieving this over the next two policy reviews in Feb-22 and Apr-22. However, if the threat from Omicron turns out to be grave, then the wait and watch mode could continue to prevail.