With inflation remaining at ‘elevated levels’, the Monetary Policy Committee (MPC) of the Reserve Bank of India unanimously decided to raise the policy repo rate by 50 basis points (bps) to 5.4%.
“Inflation is projected to remain above the upper tolerance level of 6% through the first three quarters of 2022-23, entailing the risk of destabilising inflation expectations and triggering second round effects,” the MPC said in a statement, explaining the rationale for its decision on Friday. “Given the elevated level of inflation and resilience in domestic economic activity... further calibrated monetary policy action is needed to contain inflationary pressures, pull back headline inflation within the tolerance band closer to the target, and keep inflation expectations anchored so as to ensure that growth is sustained,” it added.
Highlights of the RBI’s fourth monetary policy review of fiscal year 2022-23
Key short-term lending rate (repo) raised by 50 basis points (bps) to 5.4%
In all, 140 bps hike in repo since May 2022 to check inflation
GDP growth projection for 2022-23 retained at 7.2%
GDP growth projection: Q1 at 16.2%; Q2 at 6.2%; Q3 at 4.1%; and Q4 at 4%. Real GDP growth for Q1:2023-24 projected at 6.7%
Retail inflation projection too retained at 6.7% for 2022-23. Inflation projection: Q2 at 7.1%; Q3 at 6.4%; and Q4 at 5.8%; Q1:2023-24 at 5%
India witnessed large portfolio outflows of USD 13.3 billion in FY23 up to August 3
Depreciation of rupee more on account of appreciation of US dollar rather than weakness in macroeconomic fundamentals of the Indian economy
Rupee depreciated by 4.7% against US dollar this fiscal year till August 4
India’s foreign exchange reserves remain fourth largest globally
Next meeting of rate-setting panel scheduled for September 28-30, 2022
The MPC also said it would remain focused on “withdrawal of accommodation” to ensure that inflation remains within the target, while supporting growth.
The RBI retained its inflation and GDP growth projections for the current fiscal year ending in March 2023 at 6.7% and 7.2%, respectively.
Consequently, the standing deposit facility (SDF) rate stands adjusted to 5.15%; and the marginal standing facility (MSF) rate and the Bank Rate to 5.65%.
Addressing a press conference, Governor Shaktikanta Das said the RBI would use a “whatever-it-takes” approach to ensure a safe and soft landing for the economy despite the uncertainties.
The policy response to the unfolding economic situation would be ‘calibrated, measured and nimble’, Mr. Das said.
“In an ocean of high turbulence... Indian economy is an island of microeconomic and financial stability,” Mr. Das asserted. “Economic growth is resilient and all this [financial stability, microeconomic stability , resilience of growth] has become possible despite two Black Swan events [pandemic and Russia’s invasion of Ukraine] happening one after the other and despite multiple shocks,” Mr Das said.
Observing that there were signs that Consumer Price inflation (CPI) had peaked and was expected to moderate going into the fourth quarter, Mr. Das said, “but inflation still remains at uncomfortable and unacceptably high levels. And therefore, monetary policy has to act as there are also several uncertainties clouding the outlook”.
Mr. Das said the excess liquidity in the system was being gradually brought down. “There will be two-way fine-tuning operations with regards to liquidity, based on the evolving situation to ensure that there is adequate liquidity in the system,” he emphasised.
On the external sector, Mr. Das said the Current Account Deficit (CAD) would remain within manageable limits and the RBI had the ability to finance the CAD. “The forex reserves remain strong and RBI will effectively deal with excess volatility of the exchange rate and the umbrella remains strong,” he added.
Asked what impact he foresaw on India from a possible third Black Swan event [China acting against Taiwan], Mr. Das said, “It is extremely premature to call it a Black Swan event”. However, as far as India was concerned its trade with Taiwan was ‘miniscule’ at about 0.7% of the country’s total trade. “Therefore, the impact on India is expected to be very, very negligible. Capital flows and FDIs are very low so therefore Indian is not going to be impacted,” he asserted.
