Slack in the economy and uncertainty over the impact of Omicron prompted all six members of the Monetary Policy Committee (MPC) to vote unanimously to leave the policy repo rate unchanged at 4 per cent.

Further, the members voted by a majority of 5 to 1 to retain the accommodative policy stance. Though many experts were expecting the Reserve Bank of India to take the next step towards monetary policy normalisation — that is upping the reverse repo rate by 15/20 basis points, this rate was left unchanged at 3.35 per cent.

Sensex surges 1,016 points

The financial markets gave a thumbs up to the dovish monetary policy stance.

The bellwether BSE Sensex jumped 1,016.03 points over the previous close. Price of the benchmark 10-year Government Security (coupon rate: 6.10 per cent) rose 31 paise, with its yield declining about 4 basis points.

RBI Governor Shaktikanta Das said: “The MPC regarded the accentuation of headwinds emanating from global developments as the main risk to the domestic outlook, which is now somewhat clouded by the Omicron variant of Covid-19.

“Moreover, given the slack in the economy and the ongoing catching-up of activity, especially of private consumption, which is still below its pre-pandemic levels, continued policy support is warranted for a durable and broad-based recovery.”

Das observed that, overall, the recovery that had been interrupted by the second wave of the pandemic is regaining traction, but is not yet strong enough to be self-sustaining and durable. This underscores the vital importance of continued policy support.

The Governor emphasised that in the current situation, it is important to keep inflation aligned with the target (4 per cent) while focussing on a robust growth recovery.

Das said price stability remains the cardinal principle for monetary policy as it fosters growth and stability, adding that MPC’s motto is to ensure a soft landing that is well timed.

“The Indian economy is relatively well-positioned on the path of recovery, but it cannot be immune to global spillovers or to possible surges of infections from new mutations including the Omicron variant.

“Hence, fortifying our macroeconomic fundamentals, making our financial markets and institutions resilient and sound, and putting in place credible and consistent policies will assume the highest priority in these uncertain times,” the Governor said.

Rebalancing liquidity

In continuation of its liquidity rebalancing exercise, the central bank will enhance the 14-day variable rate reverse repo (VRRR) auction amounts on a fortnightly basis — ₹6.5-lakh crore on December 17, and further to ₹7.5-lakh crore on December 31.

The central bank said the liquidity rebalancing will be in a non-disruptive manner while maintaining adequate liquidity to meet the needs of the productive sectors of the economy.

From January 2022 onwards, liquidity absorption will be undertaken mainly through the auction route.

Dinesh Kumar Khara, Chairman, State Bank of India, observed that the RBI policy announcement addresses monetary policy and money separately, with the rate-setting divorced from calibrated liquidity management.

The growth and inflation outlook look delicately poised even as the omicron virus threat has put an element of uncertainty all around, he added.

GDP & inflation

Das observed that the inflation trajectory is likely to be in line with its earlier projection of 5.3 per cent for FY22 but price pressures may persist in the immediate term. RBI has revised the third quarter retail inflation forecast upwards to 5.1 per cent from 4.5 per cent earlier. The central bank, however, lowered the fourth quarter retail inflation projection a tad to 5.7 per cent from 5.8 per cent earlier.

Overall, RBI has retained its FY22 retail inflation projection at 5.3 per cent.

It also retained the projection for real GDP growth at 9.5 per cent in FY22. However, it lowered the third and fourth quarter GDP projection to 6.6 per cent (earlier projection: 6.8 per cent) and and 6 per cent (6.1 per cent), respectively.