New Delhi: The Reserve Bank of India’s Monetary Policy Committee (MPC) raised the benchmark repo rate for the sixth time in a row on Wednesday. This time the hike is by 25 basis points, to 6.5 per cent, citing the persistence of core inflation as a factor influencing the decision.
The MPC’s decision, taken with a majority of four members out of six, follows a 35 basis point hike in the repo rate in December. Since May 2022, the MPC has raised the repo rate by a total of 250 basis points, from the 4 per cent it had set in place during the pandemic to the current 6.5 per cent.
The repo rate is the rate of interest the RBI charges commercial banks for loans it gives them. This, in turn, influences the rate of interest that these commercial banks charge their borrowers.
The MPC’s actions are in line with expectations, with analysts saying that it would not implement a rate hike higher than 25 bps.
In his statement, RBI Governor Shaktikanta Das said that although global growth prospects have improved, there are still substantial amounts of uncertainty due to “aggressive monetary policy actions, volatile financial markets, debt distress, protracted geopolitical hostilities, and fragmentation.”
However, within this scenario, the Indian economy remains resilient, he added.
“Higher rabi acreage, sustained urban demand, improving rural demand, robust credit expansion, gains in consumer and business optimism, and the government’s enhanced thrust on capital expenditure and infrastructure in the Union Budget 2023-24 should support economic activity in the coming year,” the Governor said.
On the flip side, he said that weak external demand and the uncertain global environment would be a drag on domestic growth prospects.
On the inflation front, Das pointed out that while it is expected to ease in 2023-24, it is likely to be above the 4 per cent target, adding that the future outlook remains uncertain due to geopolitical tensions, global financial market volatility, rising non-oil commodity prices, and volatile crude oil prices.
Also read: RBI projects India’s GDP growth at 6.4 per cent for 2023-24
Core inflation matter of concern
Retail inflation, as measured by the Consumer Price Index (CPI), has thus far eased by 105 basis points during November-December 2022, from 6.8 per cent in October 2022.
“This was due to a softening in food inflation on the back of a sharp deflation in vegetable prices, which more than offset the inflationary pressures from cereals, protein-based food items and spices,” Das explained. “As a result of this, earlier than anticipated and steeper seasonal decline in vegetable prices, inflation for Q3: 2022-23 has turned out to be lower than our projections.”
He added that the core CPI inflation rate (CPI excluding food and fuel), however, remained elevated.
Regarding food inflation, he said that the outlook seemed favourable due to a likely bumper harvest of rabi crops, especially wheat and oilseeds. In addition, mandi arrivals and kharif paddy procurement have been robust, resulting in an improvement in buffer stocks of rice.
“Headline inflation has moderated with negative momentum in November and December 2022, but the stickiness of core or underlying inflation is a matter of concern,” Das said, adding that there is a need to see a decisive moderation in inflation.
The central bank governor also reiterated his commitment to reducing inflation, explaining that this was why the MPC had decided to implement yet another rate hike in this meeting.
“We have to remain unwavering in our commitment to bring down inflation,” he said. “Thus, monetary policy has to be tailored to ensuring a durable disinflation process. A rate hike of 25 basis points is considered as appropriate at the current juncture.”
Overall, the RBI projects inflation in the upcoming financial year 2023-24 to average 5.3 per cent, with a gradual increase in inflation over the year. The central bank projects inflation at 5 per cent in Q1 (April-June 2023), 5.4 per cent in Q2 (July-September 2023), 5.4 per cent in Q3 (October-December 2023), and 5.6 per cent in Q4 (January-March 2024).
Growth outlook upbeat
Das said that the available data for Q3 and Q4 2022-23 indicate that economic activity in India remains resilient. “Urban consumption demand has been firming up, driven by sustained recovery in discretionary spending, especially on services such as travel, tourism and hospitality. Passenger vehicle sales and domestic air passenger traffic posted robust year-on-year (y-o-y) growth,” he added.
The Governor further said that domestic air passenger traffic crossed pre-pandemic levels for the first time in December 2022, while rural demand, as measured by the sales of tractors and two-wheelers, continues to show signs of improvement.
Even on the private sector investment side, he said that investment activity continues to gain traction.
“Indicators of fixed investment–cement output; steel consumption; and production and import of capital goods–registered robust growth in November and December,” Das said. “In several sectors such as cement, steel, mining and chemicals, there are signs that additional capacity is being created in the private sector.”
Overall, the central bank predicts GDP growth to be at 6.4 per cent in 2023-24 – marginally lower than the baseline growth of 6.5 per cent predicted by the Economic Survey. Growth in the April-June 2023 quarter is expected to be 7.8 per cent, 6.2 per cent in the July-September 2023 quarter, 6.0 per cent in the October-December quarter, and 5.8 per cent in the January-March 2024 quarter.
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