The Reserve Bank of India (RBI) has raised the benchmark lending rates by 25 basis points—marking the first hike since February 2023—as inflation concerns mount, according to a statement issued by the central bank's Monetary Policy Committee (MPC) on Wednesday. The decision was taken unanimously by the rate-setting panel.
Following the MPC decision, the repo rate, or the rate at which the central bank lends to commercial banks, has risen from 5.25% to 5.5%. This is line with expectations, as 60% of economists polled by Reuters had projected a quarter-percentage point rate hike.
The Standing Deposit Facility (SDF) rate now stands at 5.25%, whereas the Marginal Standing Facility (MSF) rate and Bank Rate were raised to 5.75%.
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Apart from increasing the lending rates, the RBI has also walked away from its stance of monetary accommodation. The banking sector regulator has shifted its stance to "calibrated tightening", in a decision that was backed by four out of the six MPC members.
RBI Governor Sanjay Malhotra, while releasing the MPC statement, said rate cuts are "off the table" in the near future given the external headwinds and growing inflation risks. The rate-setting panel will only hold the rates, or decide on increasing them, depending on how the macroeconomic conditions evolve, he said.
The concerns around inflation has also worsened due to the El Nino weather phenomenon, which led to deficient rainfall, Malhotra explained. The dry Monsoon season not only impacted the Kharif crop, but also poses threat to the Rabi sowing seasont. This could aggravate food inflation, which has been the primary driver of consumer price index-based inflation in recent months.
Notably, headline consumer inflation has breached the Reserve Bank's 4% target for three consecutive months, quickening to 4.82% in August.
Inflation Forecast
Malhotra said that the RBI sees July-September inflation at 5.2%, higher than 5% anticipated earlier. The October-December inflation is seen at 6%, as compared to 5.9% projected earlier. In the final quarter of FY27, the headline CPI number is seen at 5.7%, as against the previous forecast of 5.5%.
Overall, the FY27 retail inflation is estimated at 5.2%, as against 5% projected by the RBI at the end of the previous MPC meeting in August. The core inflation, which strips away the volatile food and fuel costs, is seen at 4.4% as against 4.3%.
In the first quarter of FY28, or the April-June period of next year, the inflation is seen at 5.6% as compared to 5.3% projected earlier by the RBI.
GDP Forecast
Malhotra also shared the central bank's updated economic projections, highlighting a more optimistic outlook for the fiscal year. The RBI has revised its overall GDP growth forecast for FY27 upward to 7.1%, a notable increase from the earlier estimate of 6.7%.
Breaking down the fiscal year, the RBI expects strong momentum in the upcoming quarters. The growth projection for the second quarter has seen a significant boost, raised to 7.2% from the previous 6.4%. Similarly, the Q3 forecast has been upgraded to 6.9% from 6.5%, while the estimate for the fourth quarter remains unchanged at 6.8%.
Looking ahead to the next fiscal year, the initial forecast shows a slight moderation. GDP growth for the first quarter of FY28 is now projected at 7.1%, a minor downward adjustment from the previously anticipated 7.3%.
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