Geopolitical Risks Take Centre Stage - RBI Projects Lower Growth, Higher Inflation

Shanti Ekambaram, Group President- Consumer Banking, Kotak Mahindra Bank

In line with expectations there was no change in key headline interest rates and the stance continued to be accommodative. While the pandemic has receded except for a blip in January 2022, geopolitical risks due to the Russia-Ukraine war, have resulted in higher commodity prices, supply shortages, volatile global financial markets and divergent global monetary policy responses.

This has begun to impact growth and supply shortages. High commodity prices and fuel hikes will result in higher input costs and thus, have a cascading effect across the economy. Accordingly, the RBI estimates FY2023 growth at 7.2% vs 7.8% earlier and FY2023 inflation at 5.7% against 4.5% earlier. The RBI has estimated crude oil prices at 100$ a barrel during the year.

While there was no increase in repo rate - the central bank moved the SDF and MSF corridor to 3.75% and 4.25% respectively. In effect, the overnight rate will move to 3.75%. With VRRR and VRR being the key liquidity management tools - fixed rate repo as a benchmark has lost its relevance. In essence, overnight rates have been hiked to 3.75%.

Overall, given the geopolitical situation, the RBI will use all measures to maintain economic stability and will likely dynamically manage the situation. While the RBI has further extended liquidity support, it may be time to rethink its accommodative stance in the coming weeks. The RBI continues to stay committed to support growth and manage inflation within the targeted benchmarks.

Source : Equity Bulls

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RBIMonetaryPolicy Views KotakMahindraBank