The Reserve Bank of India’s monetary policy committee on Wednesday expectedly raised the policy repo rate by 35 basis points (0.35 per cent). However, it decided to continue with its “withdrawal of acommodation” stance, even as it lowered its GDP growth expectations for the current financial year amid global headwinds.
The RBI has raised the repo rate (the rate at which it lends commercial banks) in each of the policy meetings since May 2022. Including today’s hike, the repo rate has now been raised to 6.25 per cent from 4 per cent when it held an unscheduled meeting in May, thats a 2.25 per cent cumulative increase. With inflation showing some early signs of easing and the US Federal Reserve also likely to slowdown its future rate increases, the RBI was expected to moderate its tightening, following the 50 bps points repo rate hike over the previous three MPC meets.
In his assessment, RBI Governor Shaktikanta Das noted that the global economy is still marred by profound shocks and unprecedented uncertainty, and mixed signals are emanating from the geopolitical situation and financial market volatility.
He pointed that the IMF has projected that more than one-third of the global economy will contract this year or next year. Yet, in a hostile international environment, the Indian economy remains resilient, drawing strength from its macroeconomic fundamentals, and the country’s financial system remains robust and stable, he added. Still, he said an interest rate hike was warranted to keep inflation, which remains above RBI’s upper end of the 2-6 per cent target band, in check.
“While headline inflation may ease through the rest of the year and Q1 2023-24, it is expected to rule above the target. The medium-term inflation outlook is exposed to heightened uncertainties from geopolitical tensions, financial market volatility and the rising incidence of weather-related disruptions. On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects,” said Das.
He pointed that adjusted to inflation the policy rate still remained accommodative. Under the RBI Act, the inflation targeting framework mandates the central bank to maintain consumer price index (CPI) inflation at 4 per cent, with an upper tolerance limit of 6 per cent and lower limit of 2 per cent.
Retail inflation has been trending above 6 per cent for over three quarters now. It hit a five-month high of 7.4 per cent in September, before easing to 6.77 per cent in October. Das noted that core inflation (price changes in goods and services excluding food and fuel) was exhibiting stickiness.
RBI expects inflation in the current financial year ending March 2023 to come in at 6.7 per cent; while in the October-December quarter it is projected at 6.6 per cent, its likely to fall to 5.9 per cent, which is below the 6 per cent upper limit, in the January-March quarter. Inflation in the April-June quarter is further seen easing to 5 per cent, before rising again to 5.4 per cent in July-September.
Overall, through the next 12 months, inflation is expected to trend above the 4 per cent target.
“Global commodity prices, including crude oil, have undergone some downward correction, but uncertainty continues to surround the near-term outlook in view of the prolonging geo-political hostilities. The outlook for the US dollar and hence imported inflation also remains uncertain. Moreover, the resurgence in domestic services sector activity could also lead to price increases, especially as firms pass on input costs,” said Das.
While Indian economy is expected to remain resilient, its not completely immune to global uncertainties and slowdown in the developed world. In this backdrop, the RBI has marginally reduced its real GDP growth expectations for the current financial year to 6.8 per cent (4.4 per cent in December quarter and 4.2 per cent in March quarter), versus 7 per cent it had forecast earlier. Looking ahead in the 2023-24 financial year, RBI sees real GDP growing at 7.1 per cent in the April-June quarter and 5.9 per cent in July-September.
“In an interconnected world, we cannot remain entirely decoupled from adverse spillovers from the global slowdown and its negative impact on our net exports and overall economic activity. The biggest risks to the outlook continue to be the headwinds emanating from protracted geopolitical tensions, global slowdown and tightening of global financial conditions,” Das said.
Even after the downward growth revision, India will still be among the fastest growing major economies in the world, he stressed.
“India is widely seen as a bright spot in an otherwise gloomy world.”
Das noted that the system liquidity remains in surplus and in the period ahead liquidity conditions are likely to improve due to factors including moderation in currency in circulation in the post-festival period, pickup in government expenditure in the last few months of the financial year and higher foreign exchange inflows due to the return of portfolio investors.
The Reserve Bank remains “nimble and flexible” in its liquidity management operations to meet the requirements of the productive sectors of the economy, he reiterated. But, he also stressed that market participants must “wean” themselves away from the overhang of liquidity surpluses.
Das said that the RBI will keep an “Arjuna’s eye” on evolving inflation dynamics and will be ready to act as may be necessary. The aspect of growth will obviously be kept in mind, he added.