The Reserve Bank of India (RBI) last week retained the key policy rate, repo -- the rate at which the central bank lends short-term funds to banks-- at 4 percent during the first monetary policy review of FY23. It also kept the policy stance as ‘accommodative’, indicating that the central bank is focused on boosting the economic growth. Since February 2019, RBI has cut the repo rate by 250 basis points, and the latest move seems like a balancing act.

As far as inflation is concerned, the central bank has raised its forecast to 5.7 percent against the previous estimate of 4.5 percent, signalling the end of an over two-year-long period of “ultra accommodation”. It is why the MPC, while voting unanimously to keep the stance accommodative, inserted a rider -- focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Inflation is now put before growth, the RBI governor said.

On growth, the central bank cut its projections for the economy in the current financial year. FY23 GDP growth projection is now to 7.2 percent from an earlier estimation of 7.8 percent, in the background of escalating geopolitical tensions which may hit economic recovery through elevated commodity prices and global spill-over channels. The RBI also expressed concern over financial market volatility induced by monetary policy normalisation in advanced economies.

A change this time is that RBI is opting to introduce the concept of the Standing Deposit Facility (SDF) in order to remove the binding collateral constraint on the central bank and strengthen the operating framework of monetary policy. Also, it has proposed to set up a multi-year plan to roll back liquidity surplus. All these indicate that the RBI, while maintaining its accommodative stance, is no less concerned in managing inflation.

I invite your opinions.