The Reserve Bank of India on Friday hiked the repo rate by 50 bps, taking the key policy rate back to the pre-pandemic level of 5.4 per cent. Today’s hike was the third such in a row, with which the cumulative rate hike since May is now 140 bps.
The central bank’s MPC (Monetary Policy Committee) said that it remains focused on “withdrawal of accommodation” to combat the elevated inflationary pressures while also supporting growth.
“These decisions are in consonance with the objective of achieving the medium term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” Governor Shaktikanta Das said.
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Sustained high inflation could de-stabilise inflation expectations and harm growth in the medium term, he added.
Inflation
The CPI-based (Consumer Price Index) inflation eased to 7 per cent in May-June 2022 from 7.8 per cent in April, but it continued to be above the RBI’s upper tolerance band of 6 per cent. Food inflation saw some moderation on softening edible oil prices, pulses and eggs. However, it returned to double digits in June due to the rise in LPG and kerosene prices.
“While the core inflation (i.e., CPI excluding food and fuel) moderated in May-June due to the full direct impact of the cut in excise duties on petrol and diesel pump prices, effected on May 22, 2022, it remains at elevated levels,” RBI said.
The central bank today retained its inflation projection for FY23 at 6.7 per cent, with CPI inflation seen at 7.1 per cent for Q2; 6.4 per cent for Q3; and 5.8 per cent for Q4. The CPI inflation for Q1FY24 is projected at 5.0 per cent.
Growth
Das said that the domestic economic and investment activity is exhibiting signs of broadening, adding that while economic indicators suggest improvement in urban demand, rural demand is still a mixed bag.
Going ahead, the RBI expects rural consumption to benefit from “brightening agricultural prospects. Further, demand for contact-intensive services and improvement in business and consumer sentiment should bolster discretionary spending and urban consumption, it said.
However, the RBI warned that elevated risks emanating from protracted geopolitical tensions, the upsurge in global financial market volatility and tightening global financial conditions continue to weigh heavily on the growth outlook.
The central bank today retained its real GDP growth projection for FY23 at 7.2 per cent, with GDP growth for Q1 seen at 16.2 per cent, for Q2 at 6.2 per cent, for Q3 at 4.1 per cent, and for Q4 at 4.0 per cent. Real GDP growth for Q1FY24 has been pegged at 6.7 per cent.