The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) announced a 50 basis points (bps) hike in the repo rate to 5.90 per cent on Friday in order to bring elevated inflation back to its target.
“Consequently, the standing deposit facility (SDF) rate is now at 5.65 per cent and the marginal standing facility (MSF) rate at 6.15 per cent”, RBI Governor Shaktikanta Das said. The SDF is the lower band of the interest rate corridor and the MSF the higher.
The MPC also retained its current stance of remaining focused on the withdrawal of accommodation, Das said. The decisions on both the rate hike and the stance saw a majority of five votes and dissent of one vote in the six-member MPC, Das said.
The policy decisions were largely along expected lines. Following the announcement of the policy, yield on the 10-year benchmark government bond was trading 2 basis points higher at 7.36 per cent. The rupee was trading at 81.66 per dollar, stronger than 81.85 per dollar at previous close.
Taking Friday’s rate hike into consideration, the MPC has hiked the benchmark policy rate by 190 bps in the current financial year.
The MPC was of the view that the persistence of high inflation necessitates the further calibrated withdrawal of monetary accommodation in order to contain second round effects and anchor inflation expectations, Das said.
Flagging upside risks to food prices and the spreading of cereal prices pressures spreading to other food products, Das said that the MPC had retained the projections for Consumer Price Index (CPI)-based inflation that were given earlier.
CPI inflation for the current financial year is seen at 6.7 per cent, with the price gauge seen at 7.1 per cent in July-September, 6.5 per cent in October-December and 5.8 per cent in January-March. CPI inflation is seen at 5 per cent in the first quarter of the next financial year.
The RBI’s target for CPI inflation is 4 per cent, with a flexibility of 2 per cent on either side. The latest data showed that CPI inflation has remained above the RBI’s target zone for the first eight months of 2022.
India’s retail inflation rate reversed its three-month downward trend in August, rising to 7 per cent from 6.7 per cent in the previous month, driven by a surge in food prices. With Russia’s invasion of Ukraine in late February exacerbating supply-side disruptions and leading to a sharp rise in prices of several global commodities, India’s retail inflation has faced upward pressure.
While pointing out that India’s gross domestic product (GDP) growth in April-June was among the highest in the world, Das acknowledged that there were downside risks to economic growth. Consequently, the MPC announced a reduction in the real GDP forecast for the current year to 7 per cent from 7.2 per cent earlier.
GDP growth in July-September is seen at 6.3 per cent, and that for October-December is seen at 4.6 per cent. The growth in January-March is seen at 4.6 per cent and that for the first quarter of the next financial year is seen at 7.2 per cent.
“With inflation likely to be largely in line with RBI’s estimates, this week’s 50 bps hike will make the ex-post forward real repo rate* positive, albeit still lower than the RBI’s estimated real neutral rate of 0.8-1 per cent,” economists from Emkay Global wrote.
“At this point, we still think that the RBI would not go too restrictive and terminal rate could hover near the estimated real rates, implying not more than 100 bps hikes ahead, including today’s decision,” they wrote.