MPC meet: RBI hikes repo rate by 50 bps to 5.4% to tame inflation

Reserve Bank governor Shaktikanta Das-led Monetary Policy Committee (MPC) has unanimously decided to hike the key policy rate for the third time in a row by 50 basis points to 5.4%. With this hike, the key policy rate now has reached the pre-pandemic levels and remains the highest since August 2019.

The central bank has also decided to focus on ‘withdrawal’ of the policy stance to control inflation and support the economy facing other challenges like rupee depreciation, unemployment, and global supply chain disruptions, among others.

The RBI’s latest repo rate hike – announced primarily to tame the high inflation of over 7% for three months now — is in sync with market expectations of a 25 to 50 bps increase in the key lending rate.

However, it’s going to burden the common man with high-interest rates on their monthly EMIs. When the RBI increases the repo rate -- a key lending rate for banks -- the interest on loans (such as home loans) rises as retail loans are benchmarked to the RBI’s repo rate, with a quarterly reset clause.

Announcing the other policy decisions of the second bi-monthly meeting of FY23, the RBI governor says the current rate hike will help the domestic economy despite global challenges. The Indian economy remains resilient, broadly on the lines of the MPC’s June resolution, says the RBI governor. “Inflationary pressures are broad-based, and core inflation remains elevated. Volatility in the global market is leading to imported inflation,” he adds.

With this decision, the SDF or standing deposit facility stands adjusted to 5.1%, while the marginal standing facility rate and bank rate have been revised to 5.65%, says the RBI governor.

In spite of the efforts made by the central bank and the government, the country's retail inflation has remained above the RBI's tolerance band of 4% (+/-2%) for six months now, thereby hurting the country's economic growth.

In this fiscal year so far, the RBI has raised the repo rate by a cumulative 1.4% – 40 bps in an off-cycle meeting in May, 50 bps in June and 50 bps today.

RBI on inflation

The RBI governor says the headline inflation will remain above its tolerance band for the first three quarters, with some relief expected in the fourth quarter of FY23.

The Das-led MPC has estimated that retail inflation is expected to remain at 6.7% in FY23 and will reduce to 5% in FY24. The CPI forecast for FY23 remains unchanged in this bi-monthly meeting as well.

In Q2 FY23, the headline inflation is expected to remain at 7.1%, Q3 FY23 at 7.4% and Q4 at 5.8%.

India's retail inflation had soared to an eight-year high of 7.79% in April 2022 on high food and oil prices. In May and June, the headline CPI inflation declined marginally to 7.04% and 7.01%, respectively.

RBI on GDP

Das says the Indian economy is expected to be the fastest growing economy in FY23, as per the International Monetary Fund (IMF) estimates. The RBI kept the projections for FY23 GDP growth unchanged at 7.2%.

The central bank in its earlier forecast had also estimated India's GDP (Gross Domestic Product) to grow at 7.2% in FY23 while keeping the projections same as its previous policy meeting.

Before the Russia-Ukraine war broke out in February, the central bank had projected the GDP to grow at 7.8% for FY23. But post the war, major international agencies reduced the India growth forecast. Morgan Stanley, the U.S. investment management company, recently cut India's GDP forecasts by 40 basis points to 7.2% for FY23 and by 30 bps to 6.4% for FY24 on the back of slower global growth.

Similarly, the World Bank trimmed India's GDP growth forecast for FY23 to 7.5% from 8%. Paris-based financial organisation OECD also said India's real GDP will grow by 6.9% in FY23 and 6.2% in FY24.