The Reserve Bank of India raised the repo rate by 25 basis points on Wednesday. The Monetary Policy Committee (MPC) voted by a 4:2 majority to reach this decision, even as core inflation stickiness has become a concern.
While the rate hike from 6.25 percent to 6.50 percent is in line with market expectations, RBI Governor Shaktikanta Das’s remarks that “we need to see a decisive moderation in inflation” , probably indicate that MPC is not yet done with the cycle.
Das said headline inflation has moderated with negative momentum in November and December 2022, but core or core inflation stickiness (which excludes changes in food and energy prices) is cause for concern. Retail inflation moderated by 105 bp during November-December 2022 from 6.8% in October.
“We need to see a decisive moderation in inflation. We have to remain firm in our commitment to reduce inflation. Therefore, monetary policy must be adapted to guarantee a lasting disinflation process. A 25 bp rate hike is considered appropriate at the current juncture. The reduction in the size of the rate increase provides an opportunity to assess the effects of the actions taken so far on the inflation outlook and on the economy in general,” Das said.
The MPC also voted by a 4:2 majority to remain focused on the removal of accommodation to ensure inflation stays on target, while supporting growth.
“The Indian economy remains resilient…inflation has shown signs of moderation and the worst is behind us. But there are concerns about underlying inflation. We can’t take our eyes off each other,” said the Governor.
Inflation, GDP projections
The central bank also revised its retail inflation projection for fiscal year 23 downward to 6.5 percent (6.7 percent previously), and for the fourth quarter to 5.7 percent (5.9 percent earlier). ). In addition, assuming a normal monsoon, retail inflation was projected at 5.3% for FY24: Q1 at 5%, Q2 at 5.4%, Q3 at 5.4%, and Q1 at 5.4%. Q4 to 5.6%, with risks evenly balanced. .
“While inflation is expected to moderate in 2023-24, it is likely to exceed the 4 percent target. The outlook is clouded by continued uncertainties from geopolitical tensions, volatility in global financial markets, rising non-oil commodity prices and volatile crude oil prices,” Das said.
The RBI has projected FY24 real GDP growth at 6.4 percent: first quarter at 7.8 percent (7.1 percent earlier), second quarter at 6.2 percent (5.9 percent), third quarter at 6.0 percent, and fourth quarter at 5.8 percent, with risks evenly balanced. However, Das warned that weak external demand and the uncertain global environment would weigh on domestic growth prospects.
AK Goel, Chairman of the Banking Association of India, said: “Clearly, policy is more focused on reining in inflation, although recent retail inflation readings show signs of moderation. RBI has placed considerable emphasis on high core inflation pressures and views this as a significant risk to growth prospects.
HDFC Bank, in a report, noted that the policy tone was more aggressive than most market participants had expected, as the RBI acknowledged that they are still far from achieving their lasting disinflation target. Going forward, the central bank is likely to become more data dependent and this does not rule out another rate hike in the next policy, he added.
Leave a Reply