RBI Monetary Policy: A Message That Interest Rates Are Headed Higher

While the RBI maintained an accommodative policy stance, the tone of the RBI policy was clear that inflation remains a worry. Says Sandeep Bagla,CEO,TRUST Mutual Fund, "In response to complex market conditions, RBI/MPC has come out with a fairly complex monetary policy. The stance remains accommodative, but less accommodative than before, however the effective rates have been hiked by 25-40 bps. Markets still to settle down from the subtle changes of the complex policy has reacted negatively, with the 10 year yields crossing the 7% mark, jumping 10-12 bps. The humongous borrowing programme starting today is likely to help the yield curve shift upwards. Inflation projections one year forward have been increased from 4.5% to 5.7%. This will encourage the long bond yields move substantially higher from here. Bank loans linked to repo rates may not get repriced upwards, but the cost of the funds will definitely go up. Over all, a complex policy with a simple message of higher rates."

The RBI today also lowered the GDP expectations for FY 2022-23 and hiked its own inflation expectations to 5.7% for FY 2022-23.

According to Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers, the downward revision of GDP growth rate and upward revision of retail inflation were expected.

"The RBI is now anticipating much faster rise in inflation than earlier. The monetary policy stance, however, remains accommodative by normal standard. The RBI is also trying to flatten the yield curve by pushing the short-term rates higher and taking measures to ensure that the yield on long dated securities do not rise much. With today's measures RBI has moved to the path of gradual increase of policy interest rate and phased withdrawal of liquidity. From a medium term perspective, the measures are supportive of growth, price stability and orderly development in the financial markets," he stated.

According to Rajiv Shastri, Director and CEO,NJ AMC as expected, the RBI has kept policy rates unchanged and the policy stance remains accommodative as well.

"This reflects the reality that inflation is driven by the supply side which monetary policy cannot address directly. Monetary tightening in this environment can cause a recession and we're happy that the RBI stood it's ground despite widespread pressure to act," he stated.