RBI MPC increases repo rate by 25 bps, pegs FY24 inflation at 5.3%

Need to see decisive decline in inflation, core inflation still sticky, says RBI governor

The Reserve Bank of India’s Monetary Policy Committee has raised the repo rate by 25 basis points to 6.50 per cent in order to bring inflation back towards the central bank’s 4 per cent target, said governor Shaktikanta Das on Wednesday.

The decision was not unanimous with four of the six members of the MPC voting in favour of the rate hike. Ashima Goyal and Jayanth Varma voted against it.

The Standing Deposit Facility (SDF) rate now stands at 6.25 per cent while the Marginal Standing Facility (MSF) rate is at 6.75 per cent. The SDF is the lower bound of the interest rate corridor and the MSF the higher.

The MPC also retained its stance of withdrawal of accommodation to ensure that inflation remains on target, Das said. The decision on the stance too, saw a voting pattern of 4-2, he said.

Taking into account the latest interest rate decision, the MPC has raised the repo rate by a total of 250 basis points since May 2022. At 6.50 per cent, the repo rate is at its highest since February 2019.

Das said that inflation is likely to remain above 4 per cent in the next financial year with geopolitical factors, non-oil commodity price pressures and volatile crude oil prices posing risks.

India’s economic activity is seen holding up well with the previous rate hikes still working their way, Das said. Consequently, further calibrated action was warranted to break the persistence of core inflation and to anchor inflation expectations, he said, emphasising that the RBI would continue to maintain a strong vigil.

With inflation seen at 5.6 per cent in the fourth quarter of 2023-24 (April-March), adjusted for inflation, the policy rate still trails pre-pandemic levels, Das said.

Moreover, with liquidity in the banking system still at a considerable surplus–banks parked a daily average of Rs 1.6 trillion worth of excess funds with the RBI in January–the stance therefore still remains accommodative, Das said.

Das reiterated on Wednesday that the stickiness of core inflation was a matter of concern and that the RBI would need to see a decisive decline in inflation.

Headline CPI inflation declined to a one-year low of 5.72 per cent in December 2022, staying within the RBI’s 2-6 per cent tolerance band but core inflation remained above six per cent. Core inflation, which strips away the volatile components of food and fuel, has remained above 6 per cent since May 2022.

Das pointed out that the reduction in the size of the RBI’s rate hikes provides the central bank room to weigh all incoming data and forecasts.

Bonds weakened slightly after the policy statement as the RBI governor did not provide any firm indications that the central bank may take a pause on rate hikes going ahead. Yield on the 10-year benchmark bond was last at 7.33 per cent, two basis points higher than previous close.

Inflation, growth forecasts

As a result of a steep decline in vegetable prices, headline CPI showed a moderation of 105 bps from October to December 2022 and a likely bumper rabi harvest is seen auguring well for food inflation in the next financial year, Das said.

However, risks to inflation include uncertainty surrounding global commodity prices crude oil, and a possible rise in commodity prices due to easing of COVID restrictions in some parts of the world, Das said.

Assuming an average price of $95 per barrel for crude oil, the MPC sees CPI inflation at 5.3 per cent in the next financial year. Inflation in the first quarter is seen at 5 per cent, followed by 5.4 per cent in the second quarter. The inflation in the third quarter is seen at 5.4 per cent, while that in the last quarter of the next financial year is seen at 5.6 per cent, Das said.

The inflation for the current financial year is seen at 6.5 per cent, he said.

Commenting on economic growth prospects, Das said that factors such as higher rabi output, broad-based credit growth, improved capacity utilisation and the government’s thrust on capital spending and infrastructure had improved the outlook. However, protracted geopolitical tensions and slowing external demand were downside risks to growth, he said.

For the next financial year, the MPC projects real GDP growth at 6.4 per cent of GDP. First quarter GDP growth is seen at 7.8 per cent, while the second quarter growth is seen at 6.2 per cent. GDP growth in the third quarter is seen at 6 per cent and that in the fourth quarter at 5.8 per cent.