RBI Monetary Policy Highlights: MPC Hikes Repo Rate By 50 Basis Points
The RBI raised its inflation forecast for FY23 to 6.7%
India's Monetary Policy Committee hiked the benchmark repo rate by 50 basis points—its second increase in two months—as it attempts to quell high inflation in the economy. The committee had first raised rates by 40 basis points at an unscheduled meeting in May.
Following the review, the MPC decided:
To raise the repo rate to 4.9%.
The standing deposit facility rate, pegged 25 basis points below the repo rate, is adjusted to 4.65%.
The marginal standing facility rate, which is 25 basis points above the repo rate, is now at 5.15%.
The committee's decision was unanimous.
In April, the MPC removed a formal stance from the monetary policy stance from its statement. Instead, the MPC said, it would remain "accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth".
The resolution accompanying the June policy review said the committee "decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth".
Persisting inflationary pressures could set in motion second-round effects on headline CPI. Hence, there is a need for calibrated monetary policy action to keep inflation expectations anchored and restrain the broadening of price pressures.MPC Resolution
Inflation Outlook
The rate hikes come in response to inflation well above the central bank's 4 (+/-2)% target. In April, retail inflation rose to 7.8%. While headline inflation may ease in May, this would be largely because of a favourable base effect.
The RBI has adjusted its inflation projection upwards. It sees inflation at 6.7% in FY23 with risks evenly balanced. The inflation forecast assumes a normal monsoon and an average oil price of $105 a barrel.
Inflation is seen at:
7.5% in Q1
7.4% in Q2
6.2% in Q3
5.8% in Q4
The inflation forecasts suggest that, for the first time under the new framework, the RBI will be seen to have failed in its inflation objective. Failure is defined as three consecutive quarters of above target inflation and requires the central bank to explain the failure in a letter to the government.
Detailing the inflation outlook, the MPC said the global geopolitical situation remains fluid and commodity markets remain on the edge, "rendering heightened uncertainty to the domestic inflation outlook".
The committee sees some relief coming from a normal monsoon, supply-side measures taken by the government and the lifting of restrictions on palm oil exports by Indonesia. It added that household inflation expectations have seen a positive impact after duties on fuel products were cut.
"Notwithstanding these positive developments, upside risks to inflation do persist," the committee said.
These risks emanate from:
Elevated commodity prices.
Revisions in electricity tariffs across many states.
High domestic poultry and animal feed costs.
Continuing trade and supply-chain bottlenecks.
Rising pass-through of input costs to selling prices in the manufacturing and services sectors.
Spike in tomato prices which are adding to food inflation.
Elevated international crude oil prices.
With no resolution of the war in sight and the upside risks to inflation, prudent monetary policy measures would ensure that the second-round effects of supply-side shocks on the economy are contained and long-term inflation expectations remain firmly anchored and inflation gradually aligns close to the target.Shaktikanta Das, Governor, RBI
Growth Outlook
High oil prices and slowing global economy are likely to weigh on local growth, with economists now paring their growth forecast for the current year to between 7% and 7.5%.
The RBI has left its growth forecast for FY23 unchanged at 7.2%. This includes:
16.2% in Q1
6.2% in Q2
4.1% in Q3
4% in Q4
The recovery in domestic economic activity remains firm, with growth impulses getting increasingly broad-based, said the committee. Urban demand is recovering and rural demand is gradually improving, it added. A normal monsoon should further support rural demand, while a pick-up in contact-based services should help urban demand.
Investment activity is also expected to strengthen, driven by rising capacity utilisation, government’s capex push and deleveraged corporate balance sheets, the committee said.
Nevertheless, the negative spillovers from geopolitical tensions; elevated international commodity prices; rising input costs; tightening of global financial conditions; and slowdown in world economy continue to weigh on the outlook.MPC Resolution
Liquidity Conditions
Having hiked the cash reserve ratio by 50 basis points in May, the RBI did not announce any fresh steps to reign in liquidity.
While surplus liquidity has moderated to about Rs 5.5 lakh crore, it has meant that the inter-bank call money rate has trended below the policy repo rate, governor Das said.
"While normalising the pandemic related extraordinary liquidity accommodation over a multi-year time frame, the Reserve bank will ensure availability of adequate liquidity to meet the productive requirements of the economy," Das said.
"The Reserve Bank will also remain focused on orderly completion of the government’s borrowing programme," he said without detailing any specific steps to ensure this.