MPC Hikes Repo Rate By 50 Basis Points

India’s Monetary Policy Committee hiked the benchmark repo rate by 50 basis points—its third straight increase—in its continuing efforts to quell inflation in the economy. The committee had first raised rates by 40 basis points at an unscheduled meeting in May, followed by 50 basis points in June.

Following the review, the MPC decided:

• To raise the repo rate to 5.4%.

• The standing deposit facility rate, pegged 25 basis points below the repo rate, is adjusted to 5.15%.

• The marginal standing facility rate, which is 25 basis points above the repo rate, is now at 5.65%.

The resolution accompanying the August policy review said the committee “decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”.

Inflation appears to have peaked, having declined for the second straight month in June.

Inflation remains uncomfortably high, Das said. Inflationary pressures are broad based and core inflation also remains high, he added. Sustained high inflation could destabilise inflation expectations, Das said.

June 2022 was the sixth consecutive month where headline inflation remained above the upper threshold, Das said in his statement. Since the last MPC meeting, global commodity prices, especially industrial metals, have eased, he added. Resumption of wheat supply from the Black Sea region could help temper international prices.

Still, the inflation forecasts suggest that, for the first time under the new framework, the RBI will be seen to have failed in its inflation objective. Failure is defined as three consecutive quarters of above target inflation and requires the central bank to explain the failure in a letter to the government.

CPI Inflation is projected at 6.7% in FY23, with Q2 at 7.1%, Q3 at 6.4%, and Q4 at 5.8%. CPI inflation for Q1FY24 is projected at 5%.

Rural demand indicators show mixed signals, the governor said. While two-wheeler sales increased, tractor sales contracted, he added. High-frequency indicators including railway and port traffic, e-way bills and commercial vehicle sales remained robust in June and July.

Capacity utilisation in manufacturing rose above its long-drawn average. Investment activity is expected to be supported by improving capacity utilisation, the government’s capex push, and strengthening bank credit.

Spillovers from prolonged geopolitical tensions, elevated commodity prices, continued supply bottlenecks and tightening global financial conditions nevertheless weigh on the outlook.

FY23 GDP growth forecast retained at 7.2% with Q1 at 16.2%, Q2 at 6.2%, Q3 at 4.1%, Q4 at 4%. Q1 FY24 growth seen at 6.7%.