The Reserve Bank of India (RBI) Governor Shaktikanta Das greets the media as he arrives at a news conference after a monetary policy review in Mumbai, India, April 8, 2022.
The Reserve Bank of India (RBI) Governor Shaktikanta Das greets the media as he arrives at a news conference after a monetary policy review in Mumbai, India, April 8, 2022. Reuters / FRANCIS MASCARENHAS

The Reserve Bank of India kept its key lending rate at a record low on Friday, as expected, as it sought to support economic growth even as inflation edged higher in the wake of the Russia-Ukraine war.

The monetary policy committee held the lending rate, or the repo rate, at 4%. The reverse repo rate, or the key borrowing rate, was also kept unchanged at 3.35%.

"The conflict in Europe has the potential to derail the global economy caught in the crosscurrent of multiple headwinds. Our approach needs to be cautious, but proactive in mitigating the adverse impact on India's growth and inflation," RBI Governor Shaktikanta Das said.

The central bank, however, said it would restore the width of the liquidity adjustment facility corridor to 50 basis points, which was seen as a first step to move away from the ultra loose monetary policy embraced during the COVID-19 pandemic.

RBI said the floor of the corridor would be the standing deposit facility rate, which was set at 3.75%, and the marginal standing facility rate at 4.25% will be the upper bound with the repo rate in between the two.

"The hawkish turn by the RBI was warranted and it is likely that central bank will change its stance to neutral in the coming policy (meeting) followed by a repo rate hike sooner than earlier expected," said Sakshi Gupta, senior economist at HDFC Bank.

Reflecting growing uncertainties, the RBI raised its inflation forecast for the current fiscal year to 5.7%, 120 basis points above its forecast in February, and cut its economic growth forecast to 7.2% for 2022/23 from 7.8% earlier.

Das said RBI will gradually withdraw system liquidity over a multi-year timeframe beginning this year but will do it in a non-disruptive manner. He said economic activity is barely above pre-pandemic levels but continues to steadily recover.

All but six of 50 respondents polled by Reuters between March 29-April 5 forecast no change in the repo rate on Friday. Thirty-two expected rates to still be unchanged by end-June.

Das said the MPC voted unanimously to keep the repo rate unchanged and to retain an 'accommodative' monetary policy stance.

Inflation has held above the RBI's 6% upper threshold so far this year, casting doubt on its current strategy of keeping rates low to bolster growth even as some other central banks are already raising borrowing costs to tamp down price pressures.

India's 10-year benchmark bond yield jumped to 7.02 %, while the rupee strengthened against the dollar to 75.85. The NSE Nifty 50 index was mostly unchanged at 17,651, as of 0541 GMT, while the S&P BSE Sensex was flat at 59,008.89.

Das also said that banks' held-to-maturity limit in debt has been increased to 23% from the current 22% until end-March 2023.

Traders have been closely watching for any measures to support the bond market in absorbing the government's record $14.31 trillion borrowing programme.

"Amid inability to explicitly support the government borrowing program, the RBI enhanced the held-to-maturity limit by 100 bps, which could calm the bond markets despite a sharp increase in inflation forecast," said Garima Kapoor, economist institutional equities at Elara Capital