scorecardresearchRBI Policy: Central Bank raises repo rate by 25 bps to 6.5%; FY24 GDP growth

RBI Policy: Central Bank raises repo rate by 25 bps to 6.5%; FY24 GDP growth seen at 6.4%

Updated: 08 Feb 2023, 11:41 AM IST
TL;DR.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) hiked the repo rate by 25 bps to 6.50 percent, as expected and maintained the stance focused on withdrawal of accommodation on February 8.

RBI Monetary policy

RBI Monetary policy

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) hiked the repo rate by 25 bps to 6.50 percent, as expected and maintained the stance focused on "withdrawal of accommodation" on February 8.  The MPC decided by a majority of 4 out of 6 to increase the policy repo rate with immediate effect.

This comes on the backdrop of retail inflation falling under the RBI’s threshold of 6 percent for three months in a row and the US Fed is easing the pace of increase in its benchmark interest rate. The six-member RBI MPC met between February 6-8 for the first monetary policy review of 2023 and the last one for FY23.

The central bank had raised the key rate by 35 basis points (bps) in the December policy after delivering three consecutive hikes of 50 bps.

A rate hike of 25 bps is considered appropriate at this juncture, monetary policy to remain agile, and alert to inflation, said the RBI Governor Shaktikanta Das in his policy speech.

Marginal Standing Facility (MSF) rate was also hiked by 25 bps to 6.75 percent. Post the rate hike, the SDF rate adjusts to 6.25 percent from 6 percent earlier. RBI left the CRR untouched. Cash Reserve Ratio (CRR) is the deposit that banks are mandated to maintain by the RBI as reserves in the form of liquid cash.

In the policy speech, RBI Governor Shaktikanta Das said that it was an opportune moment to reflect on the evolution of monetary policy. He informed that the Multiple indicator approach was adopted in April 1998. Since the early 1990s, RBI focussed on market reforms and institution building, he added.

Unprecedented events of the last few years have put monetary policy to test, Das further noted. RBI Governor said that the world economy does not look so grim now with the inflation coming down. Amid volatile global developments, the Indian economy remains resilient, Das stated. RBI to maintain a strong vigil on evolving economic situation, he added.

Inflation

Despite the recent moderation in retail inflation, Das noted that the inflation will likely remain above the 4 percent target.  Retail inflation is expected to average 5.6 percent in Q4, said the Governor. Core inflation remains sticky, which is a concern, cautioned Das.

FY24 CPI inflation estimate revised to 5.3 percent. Meanwhile, the central bank lowered the CPI inflation forecast to 6.5 percent from 6.7 percent earlier.

RBI Projections: Q1 FY24 CPI inflation seen at 5 percent, Q2FY24 at 5.4 percent, Q3FY24 at 5.4 percent, and Q4FY24 at 5.6 percent.

The governor noted that the headline inflation including vegetables has been rising well above the upper tolerance band and may well remain elevated, especially with high core inflation pressures. He added that we have to remain unwavering in bringing down CPI.

Growth

RBI projects real GDP growth for 2023-24 (FY24) at 6.4 percent. 

RBI Projections: Real GDP growth for Q1FY24 is seen at 7.8 percent; Q2FY24 at 6.2 percent; Q3FY24 at 6 percent and Q4FY24 at 5.8 percent.

Outlook

On balance, the MPC is of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored. MPC believes inflation remains a major risk to the outlook. It added that breaking core inflation persistence is the key to strengthening medium-term growth prospects. The current account deficit will moderate in the H2FY23.

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First Published: 08 Feb 2023, 10:06 AM IST