The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) unanimously voted on Wednesday to raise the policy repo rate by 50 basis points to 4.90 percent, with immediate effect, in line with its policy of reversing the ultra-accommodative stance that was necessary to deal with the pandemic’s impact.
As a result, the standing deposit facility (SDF) rate has been changed to 4.65 percent, while the marginal standing facility (MSF) rate has been adjusted to 5.15 percent, and the Bank Rate has been adjusted to 5.15 percent.
While announcing the rate hike, RBI governor Shaktikanta Das stated that the MPC unanimously resolved to remain focused on withdrawing accommodation to ensure that inflation remains within the goal going forward while supporting growth.
He stated the real GDP growth rate for 2022-23 has been kept at 7.2 percent, with 16.2 percent in Q1, 6.2 percent in Q2, 4.1 percent in Q3, and 4.0 percent in Q4, with risks broadly balanced.
With a typical monsoon in 2022 and an average crude oil price (Indian basket) of US$ 105 per barrel, inflation in 2022-23 is now expected to be 6.7 percent, with Q1 at 7.5 percent, Q2 at 7.4 percent, Q3 at 6.2 percent, and Q4 at 5.8 percent, with risks evenly balanced.
The food group is responsible for over 75% of the increase in inflation estimates. Furthermore, he added, the baseline inflation prediction of 6.7 percent for 2022-23 does not account for the impact of current monetary policy activities.
Headline inflation climbed by around 170 basis points between February and April.
“With no end in sight to the war and upside risks to inflation, prudent monetary policy measures would ensure that the economy’s second-round effects of supply side shocks are contained, long-term inflation expectations are firmly anchored, and inflation gradually aligns closer to the target,” he said.
Mr Das stated that monetary policy initiatives, including the withdrawal of accommodation, will be tailored to meet the needs of the ongoing economic recovery.
“The battle in Europe lingers, and we are encountering greater obstacles every day,” Governor Das said in his monetary policy statement, “which is exacerbating the existing supply chain disruptions.”
“As a result, food, energy, and commodity costs are all continuing to rise. Inflation is at decadal highs in many countries, with persistent demand-supply imbalances. “Inflation has become globalised as a result of the war,” he remarked.
Central banks are, predictably, reorienting and recalibrating their monetary policies. Increased market turmoil, monetary policy moves in advanced economies (AEs), and their spillovers are posing greater challenges to emerging market economies (EMEs). According to him, the process of economic recovery in EMEs is also being hampered.
“The Indian economy has been resilient throughout these trying times, thanks to strong macroeconomic fundamentals and buffers.” Despite the pandemic and the war, the recovery has accelerated,” he remarked.
“Inflation, on the other hand, has risen sharply and far over the top tolerance limit. A series of supply shocks tied to the conflict are responsible for a major portion of the increase in inflation. In light of these circumstances, we’ve begun a steady and orderly phase-out of the special accommodations put in place during the pandemic,” he continued.
Mr Das stated that the Reserve Bank would remain proactive and resolute in addressing the economic consequences of the ongoing geopolitical crises.
“We have already reprioritized our measures to keep inflation under control while not losing sight of the need for growth.” “Our strategy demonstrates a willingness to gradually return to normal monetary conditions,” he said.
“We’ll keep working to bring inflation closer to the target and promote macroeconomic stability,” he continued.
The monetary policy committee (MPC) unanimously voted to raise the interest rate.