RBI Monetary Policy Highlights: MPC Hikes Repo Rate By 25 Basis Points, Maintains Caution On Inflation

India's Monetary Policy Committee has hiked the benchmark repo rate by 25 basis points to the highest since 2018, as it continues efforts to bring inflation closer to it's target amid resilient activity in the economy.

Following the review, the MPC decided:

• To raise the repo rate to 6.50% by a majority of four out of the six members. Ashima Goyal and Jayanth R. Varma voted against the repo rate hike.

• The standing deposit facility rate, pegged 25 basis points below the repo rate, is adjusted to 6.25%.

• The marginal standing facility rate, which is 25 basis points above the repo rate, is now at 6.75%.

The committee had first raised rates by 40 basis points at an unscheduled meeting in May, followed by 50 basis points each in June, August and September. It raised rates by a further 35 basis points in December last year.

Ashima Goyal and Jayanth R. Varma voted against this part of the resolution.

The RBI's hike and the split mandate was as expected, said Suvodeep Rakshit, senior economist, Kotak Institutional Equities. The stance, too, was unchanged which is in line with the excess liquidity continuing to be tightened.

With the stance continuing to focus on withdrawal of accommodation, the window remains open for further rate hikes if inflation exceeds the MPC's projections, said Aditi Nayar, chief economist at ICRA. "We expect the MPC to remain vigilant and data dependent in FY2024," she said.

"We see the RBI remaining concerned on inflation, especially core inflation," Rakshit said. The RBI will likely become increasingly data dependent and look at the impact of the past rate hikes on inflation-growth dynamics. "We expect the RBI to pause from the next policy onwards with a likely shift in stance to neutral as the liquidity tightens further over March-April," Rakshit said.

Inflation Outlook

The outlook for inflation is mixed.

• While prospects for the rabi crop have improved, especially for wheat and oilseeds, risks from adverse weather events remain.

• The global commodity price outlook, including crude oil, is subject to uncertainties on demand prospects as well as from risks of supply disruptions due to geopolitical tensions.

• Commodity prices are expected to face upward pressures with the easing of COVID-related mobility restrictions in some parts of the world.

• The ongoing pass-through of input costs to output prices, especially in services, could continue to exert pressures on core inflation.

Growth Outlook

Economic activity remains resilient. Urban demand firmed up further, supported by a sustained recovery in contact intensive services, while rural demand is showing signs of improvement, said Das. Investment activity continues to gain traction, he said.

• The stronger prospects for agricultural and allied activities are likely to boost rural demand.

• The rebound in contact-intensive sectors and discretionary spending is expected to support urban consumption.

• Strong credit growth, resilient financial markets, and the government’s continued thrust on capital spending and infrastructure create a congenial environment for investment.

• On the other hand, external demand is likely to be dented by a slowdown in global activity, with adverse implications for exports.

"The MPC's growth outlook for H2 FY2024 is higher than our projections, albeit similar to our assessment of the potential GDP growth," Nayar said. This may have fed into the committee's higher-than-expected inflation projection for that period, underpinning the continued cautiousness signaled by the unchanged stance, she said.