The RBI policy rate is now at its highest level since August 2018.
This is the fifth rate hike by the central bank in this financial year. Prior to this, the RBI had raised the repo rate – by 40 bps in an off-cycle meeting in May and 50 bps in June, August and September.
Most market experts expected the MPC to raise the repo rate by 35 bps in this meeting to tame the raging inflation which has continued to remain above the 6 per cent mark for the 10 straight month in October.
The RBI governor further announced that the MPC decided to remain focused on the withdrawal of accommodation and added that the standing deposit facility (SDF) rate stands adjusted to 6.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent.
During his speech, the RBI governor said that the policy rate remains accommodative and noted that the core inflation is indicating stickiness. The medium-term inflation outlook is exposed to global developments and weather.
Commenting on India’s economic growth, Das said the growth is supported by rural, manufacturing and services sector.
“Agriculture sector remains resilient. Manufacturing, services PMI for India in November among the highest in the world. Going ahead, investment activity will get support from government capex,” he said.
Das said that the RBI’s GDP growth forecast for the current financial year (FY23) is seen at 6.8 per cent. The growth has been reduced from RBI’s previous estimate of 7 per cent.
The RBI chief estimated the economic growth for the third quarter (Q3) of FY23 at 4.4 per cent (down from 4.6 percent earlier), and for the fourth quarter (Q4) at 4.2 per cent (down from 4.6 per cent earlier). Additionally, the RBI’s GDP growth forecast for April-June 2023 (Q1 FY24) was lowered to 7.1 per cent from 7.2 percent and GDP growth for July-September 2023 is seen at 5.9 per cent.
He added that despite a marginal downward revision in GDP growth at 6.8 per cent, India will remain the fastest-growing major economy in the world. Das said that the central bank’s actions will be nimble for the best interest of the economy. 6.8 per cent growth estimated in FY23 indicates a very strong growth impulse against the global backdrop.
Speaking about inflation, Das said the RBI sees the FY23 CPI estimate at 6.7 per cent. It remains unchanged from the previous estimate of the central bank.
The CPI inflation forecast for the October-December quarter (Q3) was raised to 6.6 per cent from 6.5 per cent and the forecast for the January-March quarter (Q4) was raised to 5.9 per cent from 5.8 per cent.
The CPI inflation forecast for the April-June quarter (Q1 FY24) was retained at 5.0 per cent and the retail inflation for the July-September quarter (Q2 FY24) is seen at 5.4 per cent.
Speaking on liquidity, Das said that the RBI is ready to conduct liquidity adjustment facility (LAF) operations to infuse liquidity into the system and the liquidity conditions are set to improve. He said that the system liquidity remains in surplus.
Das said that there will be no lep-up in efforts to bring down inflation. He said that the RBI remains in contraction mode but is ready to step in to provide liquidity. Market participants must wean themselves away from the overhang of easy liquidity conditions.
Speaking on the currency front, Das noted that from April to October, the rupee appreciated by 3.2 per cent in real terms even as major currencies have depreciated and the rupee should be allowed to find its level. He said that the size of the forex reserves is comfortable and has increased. The RBI will restore normal market hours of 9 am-5 pm for call, CP, CD market.
How economists and market experts reacted:
- Adhil Shetty, CEO at BankBazaar.com said, “RBI’s decision to increase the repo rate by 35 bps is along expected lines. It’s the fifth hike this year, which tells you how stubborn the inflationary trends have been. But the view is that inflation, while remaining high, is moderating, and the rates are somewhere close to their peak. Global commodity prices and the domestic wholesale prices have come down from their peak earlier this year. All consumer loans have got costlier this year. Borrowers are under the pressure of mounting interest and rising EMIs. Deposit rates, which haven’t kept pace with the repo rate hikes, are now also spiking. As of December 2, 38 banks offered FD rates of 7.00 per cent or more on select tenors. Prepaying your home loan as and when funds are available can do wonders and shorten your ballooning loan tenor.”
- Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities said, “The RBI, in line with expectations, hiked repo rate by 35 bps to 6.25 per cent. The stance also remains unchanged at withdrawal of accommodation though the voting against this stance has increased to two members. Overall, the concern on inflation continues especially as core inflation remains sticky and elevated. Growth concerns remain limited, for now. We believe the RBI is now close to the terminal rate with the real policy rate, based on few quarters ahead inflation, around 100 bps positive. The February policy decision will be finely split between a pause and a last 25 bps hike with a bias towards a hike given that near term inflation readings is likely to remain relatively elevated around 5.5 per cent.”
- Nilesh Shah, Managing Director at Kotak Mahindra Asset Management Company said, “The RBI has given a “Main Hoon Na” (we are there ) policy, reassuring the market. In a world where central banks are fighting to regain credibility, the RBI stands tall managing conflicting objectives of growth and inflation admirably. A data-driven RBI will keep on playing balls on merit and continue to keep the growth score board moving with inflation under check.”
- Nikhil Gupta, Chief Economist at MOFSL group said, “In an expected move, policy interest rates are raised by 35 bps today, taking repo rate to 6.25 per cent and SDF to 6 per cent. Further, the governor made it clear that the fight against inflation will continue, while India’s growth remains more resilient. It is, thus, clear that there will be at least one more rate hike of 25 bps in CY23.”
- Pritam Chivukula, Treasurer at CREDAI MCHI said, “RBI’s decision to hike the interest rates to tackle the inflation and ensure domestic economic recovery was a no-brainer. The sharp acceleration of rates consecutively for the fifth time in a short period will have a short-term effect on the sentiment of homebuyers as low interest rates have been the biggest factor in the resurgence for real estate demand in the last two years. We hope that the state government will step-in again to lighten the homebuyer’s load by reducing stamp duty to boost the sentiments.”
- Madhavi Arora, Lead Economist at Emkay Global Financial Services said, “The MPC expectedly delivered a 35 bps hike with 5-1 vote and kept stance unchanged at “withdrawal of accommodation”. The tone was still cautious and data dependent, and with the governor emphasizing the need to calibrate the policy. The governor again highlighted the stickiness of core inflation the risk that sustained high inflation could unmoor inflation expectations and lead to second-round effects in the medium term. We note that while the governor justified rupee’s resilience on net, a relatively dovish tone would not have augur well for rupee which has seen sharp correction vs peers in last couple of days. This has been on account of already low forward premia in FX, and signalling of a pause would have further pressured the FX fwd premia on the downside, making carry trades less attractive for FPIs, implying fears of unwinding of these trades, ceteris paribus. A 35 bps hike today implies the ex-post real rates still sub 1 per cent — 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 bps to reach a neutral rate (albeit not necessarily implying end of cycle). At this point, we still think that the RBI would not turn too restrictive however, the extent of global disruption will remain key. We are closely watching the global pace of inflation deceleration and how the impending recession will shape DM central bank policies, which could influence the RBI’s reaction function. The still-fluid global situation might require frequent adjustments in macro and policy assessments ahead as far as terminal rates are concerned.”