The Reserve Bank of India kept key interest rates unchanged for the tenth time in a row, maintaining an accommodative stance in the face of the danger of the Omicron variant. It believes that India’s economic recovery is still in its early stages and that further policy assistance is required. Repo and reverse repo rates have remained steady at 4% and 3.35%, respectively, according to RBI Governor Shaktikanta Das.

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The repo rate is the rate at which the central bank lends to commercial banks, while the reverse repo rate is the rate at which the RBI borrows money from banks in the short term in order to drain excess liquidity from the system.

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Analysts predicted that the RBI will hike the reverse repo rate by 15-40 basis points. Instead, the RBI opted to “continue the accommodative stance for as long as required to recover and sustain growth on a long-term basis, as well as to reduce the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going ahead.”

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Inflationary pressures have been exacerbated by growing commodity prices. Markets have gotten turbulent as various central banks across the world focus on policy normalisation, including the conclusion of asset purchases and earlier-than-expected rises in policy rates.

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“Sovereign bond yields firmed up across maturities and equity markets entered correction territory. Currency markets in emerging market economies (EMEs) have exhibited two-way movements in recent weeks, driven by strong capital outflows from equities with elevated uncertainty on the pace and quantum of US rate hikes. The latter also led to an increasing and volatile movement in US bond yield,” noted the RBI. 

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Bond yields have fallen as a consequence of the accommodative stance, and bond markets are rebounding, resulting in increased market earnings for banks and banking and home finance corporations.

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“It is not surprising that bond yields have come down as such a dovish view was definitely not expected in the policy. Against this background, the decision to keep all rates unchanged is indicative not just of the status quo today, but also the lower probability of change in the coming year unless there is a substantial change in the projections of GDP and inflation”, said Madan Sabnavis, chief economist, Bank of Baroda.

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“The tone of the policy review appeared sanguine on domestic inflation and cautious on growth, with a view to not sacrificing the latter in a futile attempt to control imported inflation. With the tone being more dovish than expected leading to a back-ending of rate hike expectations, and the comeback of the reference to an orderly evolution of the yield curve, the 10-year G-sec yield cooled back to pre-budget levels. We continue to expect the 10-year yield to cross 7.0% in April 2022, once the FY2023 borrowing programme kicks off. However, it is likely to climb more slowly thereafter, given the postponement in the likely timing of the first repo rate hike to August 2022 or later, from our earlier expectation of June 2022,” said Aditi Nayar, chief economist, ICRA.

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Emerging economies are exposed to destabilizing global spillovers on a continuous basis in a global context marked by differing monetary policy stances, geopolitical tensions, rising crude oil prices, and chronic supply constraints. As a result, policymakers confront severe difficulties, even as the pandemic’s recovery is still incomplete.