RBI Hikes Repo Rate By 50 Basis Points, To Persist With Calibrated Action

India's Monetary Policy Committee has hiked the benchmark repo rate by 50 basis points—its fourth straight increase—in continuing efforts to quell inflation in the economy.

Following the review, the MPC decided:

• To raise the repo rate to 5.9% by a majority of five out of the six members.

• MPC member Ashima Goyal voted to increase the repo rate by 35 basis points.

• The standing deposit facility rate, pegged 25 basis points below the repo rate, is adjusted to 5.65%.

• The marginal standing facility rate, which is 25 basis points above the repo rate, is now at 6.15%.

The committee had first raised rates by 40 basis points at an unscheduled meeting in May, followed by 50 basis points in June and 50 basis points in August.

MPC member Jayanth Varma voted against this part of the resolution.

"The MPC is of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, restrain broadening of price pressures and pre-empt second round effects," the resolution stated. The MPC feels that this action will support medium-term growth prospects, it added.

In policy tightening, it is arduous to provide forward guidance in a continuously evolving climate, Das said. "Our actions will be carefully calibrated with data and evolving conditions," he said.

Inflation Outlook

High and protracted uncertainty surrounding the course of geopolitical conditions weighs heavily on the inflation outlook. CPI inflation remains elevated and above target, Das said.

• On the domestic front, the late recovery in sowing augurs well for kharif output. The risk of crop damage from excessive/unseasonal rains, however, remains.

• Elevated imported inflation pressures remain an upside risk for the future trajectory of inflation, amplified by the continuing appreciation of the US dollar. The outlook for crude oil prices is highly uncertain and tethered to geopolitical developments, with attendant concerns relating to both supply and demand.

• The Reserve Bank of India’s enterprise surveys point to some easing of input cost and output price pressures across manufacturing, services and infrastructure firms; however, the pass-through of input costs to prices remains incomplete.

The upcoming festive season is likely to boost demand further. Firms polled in the Reserve Bank’s enterprise surveys continued to show a pick-up in capacity utilisation, which rose a three-year high.

Growth Outlook

• The improving outlook for agriculture and allied activities and rebound in services are boosting the prospects for aggregate supply.

• The government’s continued thrust on capex, improvement in capacity utilisation in manufacturing and pick-up in non-food credit should sustain the expansion in industrial activity that stalled in July.

• The outlook for aggregate demand is positive, with rural demand catching up and urban demand expected to strengthen further with the typical upturn in the second half of the year.

• On the other hand, headwinds from geopolitical tensions, tightening global financial conditions and the slowing external demand pose downside risks to net exports and hence to India’s GDP outlook.

Liquidity Conditions

In view of the moderation in surplus liquidity, it has now been decided to merge the 28-day variable rate reverse repo with the 14-day auction under VRRR, Das announced. Consequently from now on, only 14-day VRRR auctions will be conducted. Fine-tuning operations of various maturities for absorption and injection of liquidity will continue as may be necessary from time to time, he said.

India's forex reserves are still strong, Das said, adding that about 67% of the decline in reserves is due to valuation changes resulting from dollar appreciation. "The central bank has been judicious in it's intervention in forex markets," Das said.