The Reserve Bank of India’s monetary policy committee (MPC) on Wednesday decided by a majority of four members out of six to raise its benchmark repo rate by 25 basis points to 6.5 per cent, with immediate effect. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
Since May 2022, the RBI has raised the repo rate, which is the rate at which it lends commercial banks, by 250 basis points. The lower than earlier rate hike this time around was largely expected given the current environment, where retail inflation is softening even as global growth and geo-political uncertainties remain.
RBI Governor Shaktikanta Das noted that while the global economic outlook doesn’t look as grim as it did a few months ago, and growth prospects in major economies have improved, the situation remains fluid and uncertain.
“Tighter financial conditions caused by aggressive monetary policy actions, volatile financial markets, debt distress, protracted geopolitical hostilities and fragmentation continue to impart high uncertainty to the outlook for the global economy,” said Das.
From the domestic perspective, the Indian economy has so far remained resilient and is estimated to grow around 7 per cent in the current financial year ending March 2023, according to the first advanced estimate of the National Statistical Office (NSO).
India’s CPI (consumer price index) inflation eased to 5.72 per cent in December 2022, a 12-month low. A strong decline in prices of vegetables has helped inflation come down to within RBI’s tolerance band of 2 per cent to 6 per cent. However, sticky core inflation (barring food and oil) remains a concern. Looking ahead, Das expects inflation to moderate, but still remain above RBI’s 4 per cent target.
“On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospects. Accordingly, the MPC decided to raise the policy repo rate,” he said.
RBI now sees inflation averaging 6.5 per cent in the current 2022-23 financial year and at 5.3 per cent in 2023-24. In the ongoing Jan-March quarter, retail inflation is seen at 5.7 per cent, further moderating to 5 per cent in Apr-June, but then rising slightly to 5.4 per cent in the second and third quarter and 5.6 per cent in the fourth.
“The reduction in the size of the rate hike provides the opportunity to evaluate the effects of the actions taken so far on the inflation outlook and on the economy at large. It also provides elbow room to weigh all incoming data and forecasts to determine appropriate actions and policy stance, going forward,” said Das.
On the growth front, while, global as well as India’s GDP growth has slowed, our economy still remains among the fastest growing major economy. The central bank now expects the GDP to grow at 6.4 per cent in 2023-24.
“The expected higher rabi output has improved the prospects of agriculture and rural demand. The sustained rebound in contact-intensive sectors should support urban consumption. Broad-based credit growth, improving capacity utilisation, government’s thrust on capital spending and infrastructure should bolster investment activity,” Das opined.
Despite the rate hikes since May, currently, the system liquidity remains in surplus, though of lower order compared with April 2022. The Reserve Bank will remain flexible and responsive towards meeting the productive requirements of the economy and it will conduct operations on either side of the liquidity adjustment facility (LAF), depending on the evolving liquidity conditions, added Das.
He also pointed out that the rupee had remained one of the least volatile currencies among Asian peers in 2022 and continues to be so. The depreciation of the rupee to the dollar has also been far lower than during the global financial crisis, he said.
India’s foreign exchange reserves have rebounded from $524.5 billion on October 21, 2022 to $576.8 billion as on January 27, 2023 covering around 9.4 months of projected imports for 2022-23, according to the RBI.