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IN A move that will lead to further increase in lending and deposit rates, the Reserve Bank of India (RBI) on Wednesday raised the repo rate by 25 basis points (bps) to 6.5 per cent in its fight against inflation.
At its last meeting for the current financial year, the six-member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das projected the real GDP growth at 6.4 per cent for 2023-24.
The decision to raise the repo rate — the rate at which RBI lends money to banks to meet their short-term funding needs — was taken in a 4:2 majority, with MPC members Ashima Goyal and Jayanth Varma voting against the hike. The rate-setting panel also continued with its stance of “withdrawal of accommodation” to ensure that inflation remains within the target going forward, while supporting growth.
Das said while inflation is expected to moderate in 2023-24, it is likely to rule above the 4 per cent target. “The outlook is clouded by continuing uncertainties from geopolitical tensions, global financial market volatility, rising non-oil commodity prices and volatile crude oil prices. At the same time, economic activity in India is expected to hold up well. The rate hikes since May 2022 are still working their way through the system… 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 by 25 basis points to 6.50 per cent,” he said.
This is the RBI’s sixth rate hike in a row. With this, the repo rate has been hiked by 250 bps in the current cycle. At the previous policy meeting held on December 7, the RBI hiked the repo rate by 35 bps, as compared to 50 bps in September 2022.
The reduction in the quantum of the RBI’s rate hikes provides the central bank enough elbow room to weigh all incoming data and forecasts before deciding whether to pause or not. According to the RBI, the outlook is clouded by continuing uncertainties from geopolitical tensions, global financial market volatility and rising non-oil commodity prices, even as domestic economic activity is expected to hold up well.
“Since we have moderated the pace of hike — 50 bps (in September 2022), then we did 35 bps (in December 2022), and now we did 25 bps – it gives us elbow room to assess the impact of the actions undertaken so far. It is a constant exercise which is going on, and we will continue to assess that and take an appropriate call as we go into the future,” Das said.
The RBI has projected CPI, or retail inflation at 6.5 per cent in fiscal 2022-23. For FY2024, CPI inflation is projected at 5.3 per cent.
After a peak of 7.8 per cent in April 2022, the CPI inflation moved below the upper tolerance level of 6 per cent during November-December 2022, driven by a strong decline in prices of vegetables.
Das said the MPC will continue to maintain strong vigil on the evolving inflation outlook so as to ensure that it remains within the tolerance band and progressively aligns with the target.
Commenting on the policy, State Bank of India’s Chairman Dinesh Khara said the RBI policy statement reaffirmed the commitment to bring inflation down further and ensure financial stability in markets. “In principle, RBI from its vantage position has harmonised key measures, ensuring the economy remains cushioned to the maximum extent from the impact of inflation in everyday lives,” Khara said.
On transmission of repo rate, Das said the pace of transmission of monetary policy actions to lending and deposit rates has strengthened in the current tightening cycle.
The weighted average lending rates (WALR) on fresh rupee loans and outstanding loans increased by 137 bps and 80 bps respectively, during May to December 2022. The weighted average domestic term deposit rate on fresh deposits and outstanding deposits increased by 213 bps and 75 bps respectively.
Das said the current account deficit (CAD) is expected to moderate in the second half of the fiscal 2022-23 and remain eminently manageable and within the parameters of viability. In the H1 of the current fiscal, CAD stood at 3.3 per cent of GDP.
