written by | February 10, 2022

Monetary Policy: Repo Rate kept Steady, Crypto a Threat to Stability

Maintaining an accommodative stance, the Reserve Bank of India has kept the repo rate and reverse repo rate unchanged in its Monetary Policy announced on February 10.

Amid rising inflation, the Monetary Policy Committee (MPC) kept the repo rate steady at 4 percent and the reverse repo rate at 3.35 percent, along the expected lines. This was the 10th time in a row that the status quo was maintained.

The committee headed by RBI Governor Shaktikanta Das voted unanimously to keep the interest rates the same, continuing the accommodative stance to support growth and keep inflation within the target.

Key Policy Rates Unchanged

The six-member committee kept the benchmark rates unchanged in its review and the current account deficit (CAD) is expected to be below 2 percent of FY22 of GDP.

The 10-year bond yields also declined 5 basis points to 6.75%. 

RBI has kept the projected rate unchanged for the current year at 9.2 percent while projecting the growth rate for FY23 at 7.8 percent.

In its first policy review after the Union Budget 2022, the RBI maintained the CPI inflation forecast at 5.3 percent. The Central Bank forecasted the CPI inflation for FY23 at 4.5 percent, moderating closer to 4 percent in the second half of FY23.

Talking about inflation, the RBI Governor said that “core inflation remains elevated and headline inflation is expected to peak in the 4th quarter of FY22, and continued policy support is warranted for durable, broad-based recovery.”

Economic activity had been somewhat stalled because of Omicron and keeping in mind the uncertainty due to the global spillovers and the pandemic, continued policy support is needed. Governor Das also said that the renewed surge of global crude oil price needs to be closely monitored. 

RBI also hiked the limit for foreign debt inflows via the voluntary retention route by 1 lakh crore to 2.5 lakh crore.

The following announcements related to liquidity management were also made: 

  • Variable rate repo and variable rate reverse repo auctions of 14-day tenors will operate as the main liquidity management tool
  • From March 1, fixed rate reverse repo and marginal standing facility windows will be available only between 5.30 p.m. to 11:59 p.m. on all days.

Cryptocurrency is a threat to stability: RBI Governor

In the press conference held after the monetary policy review, the RBI Governor gave a warning about cryptocurrency calling private cryptocurrencies “a big threat to our financial and macroeconomic stability and that they will undermine RBI's ability to deal with issues related to financial stability.”

It is important to note that the transfer of virtual digital assets which includes cryptocurrencies was made taxable in the hands of the receiver at 30% in the Union Budget 2022. This was the first time that the government has recognized the existence of these assets.

Shaktikanta Das also warned cryptocurrency investors that “they should keep in mind that these cryptocurrencies have no underlying asset. Not even a tulip.”

The Governor's stance on cryptocurrency is being seen as a message to the Government to be careful while making laws on these assets as lakhs of investors have put their hard-earned money into these fickle currencies.

Cryptocurrencies pose a great risk for the investors and government alike including financing for terrorism, money laundering and a threat to consumer protection. The risk of frauds, price volatility and illegal transactions are also a point of concern for the Reserve Bank.

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