The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday voted unanimously to increase the repo rate by 50 basis points to 4.90% in a bid to slow inflation that it estimates will average 7.5% in the current April-June quarter.
The MPC also decided to remain focused on the withdrawal of accommodation which had been provided to support the COVID-19 hit economy, to ensure that inflation remains within the target going forward, while supporting growth, RBI Governor Shaktikanta Das said while announcing the rate increase.
“Inflation has steeply increased much beyond the upper tolerance level,. A large part of the rise in inflation is primarily attributed to a series of supply shocks linked to the war [in Ukraine]. In these circumstances, we have started a gradual and orderly withdrawal of extraordinary accommodation instituted during the pandemic,” Mr. Das explained.
Based on the assumption of a normal monsoon in 2022, and average crude oil price (Indian basket) of $105 per barrel, inflation based on the Consumer Price Index (CPI) was now projected by the RBI at 6.7% in 2022-23, with Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and Q4 at 5.8%, with risks evenly balanced.
About 75% of the increase in inflation projections could be attributed to the food group, Mr. Das said, observing that “the recent spike in tomato prices” were adding to food inflation. Also, the baseline inflation projection of 6.7% for 2022-23 did not take into account the impact of monetary policy actions taken on Wednesday, he added.
“Between February and April, headline inflation has increased by about 170 basis points (bps),” Mr. Das stressed. ”With no resolution of the war in sight and the upside risks to inflation, prudent monetary policy measures would ensure that the second-round effects of supply side shocks on the economy are contained and long-term inflation expectations remain firmly anchored and inflation gradually aligns close to the target,” he said.
The MPC retained its forecast for real GDP growth for 2022-23 at 7.2%. Output was projected to expand by 16.2% in Q1, by 6.2% in Q2, 4.1% in Q3 and rise 4.0% in Q4, with the risks broadly balanced.
“The monetary policy actions including withdrawal of accommodation will be calibrated keeping in mind the requirements of the ongoing economic recovery,” Mr Das asserted.
“While further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9% remaining below the pre-pandemic level, the comment on the orderly completion of the government borrowing programme has served to cool the 10-year G-sec yield,” said ICRA chief economist Aditi Nayar. “We foresee further repo hikes of 35 bps and 25 bps, respectively, in the next two policies,” she added.
“The war in Europe is lingering and we are facing newer challenges each passing day which is accentuating the existing supply chain disruptions,” Mr. Das said, elaborating that as a consequence of the conflict food, energy and commodity prices remained elevated. “Countries across the world are facing inflation at decadal highs and persistent demand-supply imbalances. The war has led to globalisation of inflation,” he added.
Not surprisingly, central banks were reorienting and recalibrating their monetary policies, Mr. Das said. Emerging market economies (EMEs) were facing bigger challenges from increased market turbulence, monetary policy shifts in advanced economies (AEs) and their spillovers. The process of economic recovery in EMEs is also getting affected, he noted.
“During these difficult and challenging times, the Indian economy has remained resilient, supported by strong macroeconomic fundamentals and buffers. The recovery has gained momentum despite the pandemic and the war,” the RBI Governor asserted.
Mr. Das said that the RBI would continue to be proactive and decisive in mitigating the fallout of the ongoing geopolitical crisis on the economy.
“We have already reprioritised our policies to control inflation, without losing sight of the growth requirements. Our approach underscores a commitment to move towards normal monetary conditions in a calibrated manner,” he said.
“We will remain focused on bringing down inflation closer to the target and fostering macroeconomic stability,” he added.