A cumulative 2.25-percentage-point increase in the repo rate during 2022 is an incredibly steep climb compared to RBI’s previous interest rate upcycle. Yet, adjusted for inflation, the current policy rate remains accommodative as RBI negotiates a soft landing for the economy. It can claim success in this endeavour with GDP growth projections being pulled down by 1 percentage point over the course of 2022. Inflation, however, is expected to stay above the target 4% over the next 12 months, by the central bank’s admission. System liquidity is in surplus except for episodic tightening on account of currency demand and tax outgo. The accommodation is permitted by improved monetary transmission and allows RBI space to offer banks a softer cushion to absorb losses on their government bond holdings during a rate tightening cycle. This should keep government borrowing for capital expenditure on track.
Exchange rate intervention has delivered an appreciation of the rupee in real effective terms between April and October. India has been through an energy crisis without severe loss to its import cover. Capital flows have not been inordinately affected with portfolio investment recovering, direct investment stable and remittances robust. On balance, the persistence of inflation is outweighed by the growth dividend that RBI has sought to preserve.