RBI raises policy rates by 50 bps to pre-pandemic levels

Keeping its policy stance unchanged, the central bank’s Monetary Policy Committee (MPC) raised the repo rate from 4.9% to 5.4%. The Standing Deposit Facility Rate and the Marginal Standing Facility Rate were accordingly increased by the same amount to 5.15% and 5.65%, respectively. The rate hike decision was unanimous, though MPC member Jayant Verma disagreed on the policy stance.

While the decision was in line with the expectations of economists surveyed by Mint, it was still on the high side of their estimates. Speaking to reporters after the policy announcement, RBI Governor Shaktikanta Das said rate hikes of 50 bps have become the new normal, with several major central banks increasing policy rates by 50-100 bps.

Nevertheless, Das reiterated that the RBI will take a calibrated and measured approach on the return of monetary accommodation. “With inflation expected to remain above the upper limit in Q2 and Q3, the MPC stressed that sustained high inflation could destabilize inflation expectations and hurt growth in the medium term. Therefore, the MPC said Decided that further withdrawals of monetary accommodation are needed to keep inflation expectations stable and contain the effects of the second round,” he said.

Economists are now expecting a less aggressive hike in policy meetings, which will push the repo rate to 5.9-6% by the end of December.

Pranjul Bhandari, Chief India Economist, HSBC said that the RBI unveiled its inflation forecast in April-June 2023 at 5%, and has previously talked about real neutral rates of around 1%. “Combining the two, we feel that the repo rate can be increased to 6%. We expect to hike rates in the remaining two sittings of the year, taking the repo rate to 6% in December this year.”

The benchmark 10-year bond yield climbed 13 bps after the RBI’s decision of 7.29%. The rupee strengthened to 79.25 against the dollar.

As expected, the MPC retained its FY13 GDP forecast at 7.2% and inflation forecast at 6.7%. Governor Das said that economic growth is resilient. Capacity utilization in the manufacturing sector stood at 75.3% in January-March 2022, well above its long-term average of 73.7%, indicating the need for new investment activity in additional capacity building.

That said, the domestic economy faces adverse conditions from various global factors including global financial market volatility; strengthening global financial conditions; and the risks of a global recession. With retail inflation approaching 7% in June, the RBI believes inflation is peaking and may ease in the fourth quarter.

RBI, however, reiterated its resolve to bring it down to 4% in the medium term as it believes inflation to remain uncomfortably high. “In such an environment, with the growth momentum expected to be resilient in spite of adverse conditions from the external sector, monetary policy should proceed in its stance of taking back housing to ensure that inflation remains at 4% in the medium term. Approaches goals, while supporting development. said the servant.

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