MPC hikes repo rate by 35 bps, does not rule out possibility of further rate hikes
According to analysts, the Reserve Bank of India's attitude has mostly concentrated on the reduction of accommodation
The Reserve Bank of India's monetary policy committee (MPC) raised the benchmark repo rate by 35 basis points (bps) on December 7 to continue its fight against inflation, bringing it to 6.25 per cent. The repo rate has been increased by 1.9 per cent since May by the RBI's rate-setting panel, bringing it to 5.9 per cent before the last hike.
As retail inflation has been above the central bank's comfort level for nearly the entire year, the MPC has been on a rate rise path throughout the year, boosting policy rates by roughly two percentage points to combat inflation. On Wednesday, announcing the rate hike with a 5-1 vote in the MPC, RBI Governor Shaktikanta Das said that the RBI policy stayed very aware of the global slowdown and its spillovers while acknowledging the resilience of the Indian economy.
“The biggest risks to the outlook continue to be the headwinds emanating from protracted geopolitical tensions, global slowdown, and tightening of global financial conditions. Taking all these factors into consideration, real GDP growth for 2022-23 is projected at 6.8 per cent, with Q3 at 4.4 per cent and Q4 at 4.2 per cent. The risks are evenly balanced. Real GDP growth is projected at 7.1 per cent for Q1:2023-24 and 5.9 per cent for Q2. Even after this revision in our growth projection for 2022- 23, India will still be among the fastest-growing major economies in the world,” Das said reiterating that even after this revision in our growth projection for 2022- 23, India will still be among the fastest-growing major economies in the world.
As the RBI reduced the growth forecast in light of geopolitical tensions and doubled down on its commitment to reducing inflation, many economists who were expecting the 35-bps hike to be the last hike in the cycle, now think otherwise and hinted at a possible hike in February 2023. “While many were expecting the 35-bps hike to be the last in the cycle, the commentary by the governor does not hint about the same, which is interesting, but as the growth projections have been cut going forward, there will be more scrutiny on rate hikes. The governor remains confident about the rupee being stable even though he wants the currency to find its equilibrium price without intervention,” Sonam Srivastava, Founder, Wright Research was quoted as saying.
The Central Bank maintained its FY23 inflation forecast keeping it unchanged at 6.7 per cent despite a minor upward revision to Q3FY23 and Q4FY23 forecasts. Governor Das informed that the RBI was ready to conduct Liquidity Adjustment Facility operations to infuse liquidity into the system. “Liquidity conditions are set to improve. The weighted average lending rate is up 117 bps in May-October against all major currencies, except a few,” he said.
According to analysts, the Reserve Bank of India's attitude has mostly concentrated on the reduction of accommodation. Despite widespread agreement in the market, it appears that the rate-hiking cycle may not be over just yet. While the inflation watch remains in place, many believe that the Federal Open Market Committee's decision on December 14 is the most important event to watch. “Will keep Arjuna's eye on evolving inflation dynamics; RBI remains nimble, flexible in liquidity management,” Dr. Das said in his statement outlining the MPC decisions.
The six-person rate-setting panel increased the repo rate by 50 basis points and reaffirmed its commitment to withdrawing accommodation after its previous three-day meeting in September. However, the RBI revised its GDP forecast for FY23 down to 7 per cent from 7.2.