RBI Monetary Policy Highlights: MPC Hikes Repo Rate By 50 Basis Points
India's Monetary Policy Committee hiked the benchmark repo rate by 50 basis points—its third straight increase—in its continuing efforts to quell inflation in the economy. The committee had first raised rates by 40 basis points at an unscheduled meeting in May, followed by 50 basis points in June.
Following the review, the MPC decided:
To raise the repo rate to 5.4% unanimously.
The standing deposit facility rate, pegged 25 basis points below the repo rate, is adjusted to 5.15%.
The marginal standing facility rate, which is 25 basis points above the repo rate, is now at 5.65%.
The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.MPC Resolution
While the decision on the rate hike was unanimous, committee member Jayanth R. Varma expressed reservations on the wording of the stance.
Inflation appears to have peaked, having declined for the second straight month in June.
Spillovers from geopolitical shocks are imparting considerable uncertainty to the inflation trajectory.
Food and metal prices have come off their peaks. International crude oil prices have eased but remain elevated and volatile on supply concerns even as the global demand outlook is weakening.
The appreciation of the U.S. dollar can feed into imported inflation pressures.
Rising kharif sowing augurs well for the domestic food price outlook. The shortfall in paddy sowing, however, needs to be watched closely, although stocks of rice are well above the buffer norms.
Taking into account these factors and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, the inflation projection is retained at 6.7% in FY23, with Q2 at 7.1%; Q3 at 6.4%; and Q4 at 5.8%, and risks evenly balanced. CPI inflation for Q1FY24 is projected at 5%.MPC Resolution
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.
Rural consumption is expected to benefit from the brightening agricultural prospects.
The demand for contact-intensive services and the improvement in business and consumer sentiment should bolster discretionary spending and urban consumption.
Investment activity is expected to get support from the government’s capex push, improving bank credit and rising capacity utilisation.
Firms polled in the Reserve Bank’s industrial outlook survey expect sequential expansion in production volumes and new orders in Q2FY23, which is likely to sustain through Q4.
On the other hand, elevated risks emanating from protracted geopolitical tensions, the upsurge in global financial market volatility and tightening global financial conditions continue to weigh heavily on the outlook.
Taking all these factors into consideration, the real GDP growth projection for FY23 is retained at 7.2%, with Q1 at 16.2%; Q2 at 6.2%; Q3 at 4.1%; and Q4 at 4%, and risks broadly balanced. Real GDP growth for Q1FY24 is projected at 6.7%.MPC Resolution
Going forward the RBI will remain vigilant on the liquidity front and conduct two-way fine-tuning operations as and when warranted – both variable rate repo and variable rate reverse repo operations of different tenors, depending on the evolving liquidity and financial conditions, Governor Shaktikanta Das stated.
The central bank reinforced its emphasis on price stability by a second back-to-back 50 basis points hike to prevent sustained high inflation from destabilising inflationary expectations and hurting medium-term growth, Radhika Rao, economist at DBS Bank, said.
Policy guidance highlighted it was premature to go easy on the inflation fight as the trajectory is beholden to fluid global commodity cycle, remnant pass-through pressures from high input costs and recent rupee depreciation might lower the net beneficial impact of softer imported pressures, she said. This necessitates the monetary policy committee to continue to incrementally tighten policy in rest of FY23, according to Rao.