On Friday, the six-member Reserve Bank of India (RBI) monetary policy committee decided to raise the repo rate by 50 basis points to 5.4%, surpassing the pre-pandemic level of 5.15%.
“MPC has decided to focus on withdrawing accommodation to keep inflation within target while supporting growth”: RBI Governor
The MPC decided that the SDF rate would be adjusted to 5.15% and the MSF rate and the bank rate to 5.65%.
Das said the MPC had forecast inflation of 6.7% in 2022-23; CPI-based inflation for Q1-2023-24 is projected at 5%. The real GDP growth rate was set at 7.2% for FY23. Bank credit growth accelerated to 14% year-on-year.
RBI Governor Shaktikanta Das said CPI-based inflation is above the comfortable level.
Das said successive shocks on the global economy also have repercussions on the Indian economy. The IMF has revised down its projection for global growth. He added that the globalization of inflation coincides with the de-globalization of trade.
Additionally, Das noted that the financial market has remained unstable despite interim corrections, however, India is expected to be one of the fastest growing economies in the world.
“Rising term deposit rates should increase liquidity in the financial sector,” Das said. He pointed out that edible oil prices are expected to fall further.
The RBI Governor said domestic economic activity showed signs of widening and rural demand showed mixed trends.
This is RBI’s third rate hike in the current fiscal year. In its off-cycle monetary policy review in May, the RBI raised the repo rate by 40 basis points or 0.40% to 4.40%. Then, in June, the RBI raised the rate again to 4.90%, an increase of 50 basis points.
The repo rate is the interest rate at which the central bank lends funds to banks.
According to a BS poll, the MPC was to raise the repo rate by 35-50 basis points from the current 4.9%, bringing the policy rate back to pre-pandemic levels. The Repo rate was at 5.15% (February 2020) before the RBI started cutting interest rates to tackle the economic crisis amid the ravages of Covid-19.