Mumbai (The Hawk): The repo rate increased to 6.25 percent on Wednesday as a result of a 35-basis-point hike, according to the Reserve Bank of India. According to governor Shaktikanta Das, the RBI Monetary Policy Committee (MPC) decided to increase the rate in order to bring high inflation back to its target of 4%.
The six-member MPC continued to prioritise withdrawing accommodation during its December 5–7 policy meeting.
Although 5 out of the MPC's 6 members voted in favour of the rate increase, it was not a unanimous decision. Four out of the six members who voted did not agree on the stance, and the decision was not made unanimously.
The floor of the interest rate corridor, the Standing Deposit Facility rate, is now 35 basis points higher at 6%. The upper band of the interest rate corridor, known as the Marginal Standing Facility rate, has also been raised by 35 basis points to 6.50 percent.
The rate increase matched market forecasts. A survey conducted by the Business Standard with 10 respondents forecast a rate increase of 35 basis points. The repo rate has risen to its highest level since February 2019 at this time. The MPC has increased the repo rate by 225 basis points so far in 2022.
The 10-year benchmark bond's yield last stood at 7.29%, up four basis points from the previous close. The movement of bond prices and yields is opposite. Traders claimed that Das' frequent expressions of worry over sustained and sticky core inflation were the cause of the first weakening in bonds.
The rupee's last value against the US dollar was 82.62, unchanged from the previous closing.
According to Das, the MPC kept its 6.7% inflation prediction for the current fiscal year. However, the MPC has slightly increased its projections for both the current quarter and the following quarter. Inflation as measured by the CPI is predicted to be 6.6% from October to December, up from the previously predicted 6.5%. Headline retail inflation is anticipated to be 5.9% in January through March, down from the earlier forecast of 5.8%.
According to Das, the MPC has kept its inflation projection for the first quarter of the upcoming fiscal year at 5%, while the price gauge is expected to be at 5.4% in the second quarter.
Das highlighted ongoing price pressures and the stickiness of core inflation, which excludes the volatile components of food and fuel, while stating that CPI-based inflation is anticipated to reduce moving forward.
"There are greater uncertainty surrounding the medium-term inflation objective...
To keep inflation expectations anchored, break the core inflation persistence, and contain second-round impacts, more calibrated monetary policy action is necessary, according to Das.
Das repeatedly emphasised the need to lower excessive core inflation and referred to it as the current "primary risk." Even though future food inflation is predicted to moderate, he noted pressure points, such as rising cereal, milk, and spice prices.
He noted that "overall CPI price momentum remained high."
Due to supply-side interruptions brought on by the Covid-19 epidemic and a spike in global commodity prices following Russia's invasion of Ukraine in late February, consumer price index-based inflation has been significant for a number of months.
For ten consecutive months, CPI inflation has exceeded the upper limit of the MPC's tolerance range of 2–6%. The price measure has been above 4% for 37 straight months and was 6.77 percent in October. Core inflation was roughly 6%.
Growth forecast cut
The prediction for GDP growth for the current fiscal year was also slightly lowered by the RBI governor, going from 7% to 6.8%. Despite the revised growth prediction, he claimed that India would still be among the big economies with the fastest growth rates.
According to Das, the GDP growth for October through December is now projected to be 4.4%, down from 4.6%, while growth for January through March is projected to be 4.2%, down from 4.6%.
GDP growth is anticipated to be 7.1% in the first quarter of the upcoming fiscal year as opposed to the 7.2% that the MPC had previously predicted. 5.9% GDP growth is anticipated in the second quarter of the upcoming fiscal year.
High-frequency indicators in the most recent quarter, according to Das, revealed a strengthening of economic activity. He noted a resurgence in rural demand, strength in consumer discretionary spending, and good sales of tractors and two-wheelers as indicators.
(Inputs from Agencies)