RBI Monetary Policy Highlights: MPC Hikes Repo Rate By 35 Basis Points, Trims Growth Forecast

The RBI increased the repo rate for the fifth straight time, with five of six members voting for the hike.

<div class="paragraphs"><p>The RBI logo is pictured outside the central bank's headquarters in Mumbai. (Photo: BQ Prime)</p></div>
The RBI logo is pictured outside the central bank's headquarters in Mumbai. (Photo: BQ Prime)

India's Monetary Policy Committee has hiked the benchmark repo rate by 35 basis points to the highest since February 2019 as it continues efforts to quell inflation in the economy amidst resilient economic activity.

Following the review, the MPC decided:

  • To raise the repo rate to 6.25% by a majority of five out of the six members.

  • Jayanth R. Varma voted against the repo rate hike.

  • The standing deposit facility rate, pegged 25 basis points below the repo rate, is adjusted to 6%.

  • The marginal standing facility rate, which is 25 basis points above the repo rate, is now at 6.50%.

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

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
Resolution of the Monetary Policy Committee

Four of the six members voted to remain focused on withdrawal of accommodation to ensure that inflation remains within the target while supporting growth, with Ashima Goyal and Jayanth R. Varma voting against this part of the resolution.

A 35 basis points hike today implies the ex-post real rates still sub 1%- RBI's estimated real neutral rate, keeping 6-month ahead inflation as an anchor (a more certain trajectory vs one-year ahead), which may imply more space for another shallow hike of up to 25 basis points to reach a neutral rate, albeit not necessarily implying end of cycle, said Madhavi Arora, lead economist at Emkay.

"At this point, we still think that the RBI would not turn too restrictive however, the extent of global disruption will remain key," she said.

Inflation Outlook

CPI inflation remains elevated and above target, along with high and sticky core inflation.

  • On the domestic front, food inflation is likely to moderate going forward, though prices of cereals, milk and spices may stay elevated in the near-term on supply concerns.

  • Adverse climate events–both domestic and global–are increasingly becoming a significant source of upside risk to food prices. 

  • Unabating geopolitical tensions continue to impart uncertainty to the food and energy prices outlook.

  • The correction in industrial input prices and supply chain pressures, if sustained, could help ease pressures on output prices; but the pending pass-through of input costs could keep core inflation firm.

  • Imported inflation risks from the U.S. dollar movements need to be watched closely.

Taking into account these factors and assuming an average crude oil price (Indian basket) of $100 per barrel, inflation is projected at 6.7% in FY23, with Q3 at 6.6% and Q4 at 5.9%, and risks evenly balanced. CPI inflation for Q1FY24 is projected at 5% and for Q2 at 5.4%, on the assumption of a normal monsoon.
Resolution of the Monetary Policy Committee

On balance, the MPC is of the view that, further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the core inflation persistence and contain second round effects, so as to strengthen medium-term growth prospects, the resolution stated.

Growth Outlook

Urban consumption firmed up further, supported by a sustained recovery in contact intensive services, while rural demand is recovering with rising farm activity, said Das. Investment activity is also gaining traction, he said.

  • Agricultural outlook has brightened, with the prospects of a good rabi harvest.

  • Robust and broad-based credit growth and government’s thrust on capital spending and infrastructure should bolster investment activity.

  • Consumer confidence has further improved, along with rising optimism over business outlook.

  • According to the RBI’s survey, consumer confidence is improving.

  • The economy, however, faces accentuated headwinds from protracted geopolitical tensions, tightening global financial conditions and slowing external demand.

Taking all these factors into consideration, real GDP growth for 2022-23 is projected at 6.8% compared to 7% projected earlier, with Q3 at 4.4%; and Q4 at 4.2%, and risks evenly balanced. For Q1FY24, it is projected at 7.1%, and at 5.9% for Q2.
Resolution of the Monetary Policy Committee

Despite the moderate revision in the GDP forecast, India will continue to remain one of the fastest growing economies in the world, Das noted.

Liquidity Conditions

The governor also announced that the central bank would restore money market hours to 9 a.m. to 5 p.m.

The RBI remains nimble and flexible to meet the liquidity requirements of the economy, Das said. Despite absorption mode, the central bank is ready to conduct liquidity operations as and when needed, he added. That said, market participants need to wean themselves away from surplus liquidity conditions, he said.