The monetary Policy Committee (MPC) of RBI unanimously raised the repo rate by 50 bps to pre-pandemic levels of 5.40% and is the highest since August 2019 citing inflation concerns
The monetary Policy Committee (MPC) of RBI unanimously raised the repo rate by 50 bps to pre-pandemic levels of 5.40% and is the highest since August 2019 citing inflation concerns which have intensified and become more broad-based across goods and services. In all, a 140 bps hike in repo since May 2022 has been undertaken to check inflation. The central bank also withdrew its accommodative stance and also raised the projection for inflation for the current year to 6.7% (vs 5.7% earlier), while at the same time retaining the projected growth at 7.2%.
The focus was on the twin path of stability in prices and anchoring inflation expectation while ensuring sustainable growth. Indian economic activity is showing signs of broadening, with high-frequency indicators suggesting improvement in urban demand while rural demand is mixed. Capacity utilization in the manufacturing sector is 75.3%, above its long-run average which suggests a need for fresh investment. Good progress of southwest monsoon, Kharif sowing to support rural consumption.
At this point, the central bank believes that India’s growth in the current year would be largely resilient with the mitigation of risks of a monsoon failure and a healthy pickup in rural demand. RBI Governor has reiterated that further withdrawal of monetary accommodation is warranted due to elevated inflation. India’s foreign exchange reserves provide insurance against global spillovers. There has been a drawdown of foreign exchange reserves to limit rupee volatility despite India’s reserves being the fourth highest in the world. India’s Financial sector is well capitalized and sound. Bank credit growth has accelerated to 14% as against 5.5% a year ago.
Foreign Direct Investment (FDI) at 13.6 billion dollars in the first quarter of the current financial year was robust, as compared to 11.6 billion dollars in the first quarter of last year. The Surplus liquidity in the banking system has come down to ?3.8 lakh crore, from ?6.7 lakh crore in April-May, adding that a rise in term deposit rates should increase liquidity for the financial sector. Depreciation of rupee more on account of appreciation of US dollar rather than weakness in macroeconomic fundamentals of the Indian economy. RBI to remain watchful and focused on maintaining the stability of the rupee which has depreciated 4.7% in the current fiscal however performed better than many other currencies.
The policy statement gave enough indications of more hikes if the inflation does not come under control. The trajectory of inflation and interest rate hikes in developed economies continues to be a matter of concern, while the RBI has ensured that there is enough liquidity in the system for meeting the credit growth requirements. Globally, the headwinds continue to exist with supply-side imbalances and inflationary concerns. The inflation is not transitory as expected earlier and the Fed is behind the curve in taming inflation. The larger and faster hike in interest rates could unrattled financial markets and currency in the short term, and RBI is being proactive in responding to these anticipated risks. The wage inflation continues to be high, and commodities are still at elevated levels including oil which is close to $ 95-100 levels. Our sense is coupled with fiscal policies, resolving local supply chains to ease the supply side issues, and a normal monsoon will help address some of the inflation concerns. RBI continues to signal that all options are on the table, which is a prudent strategy given the elevated levels of uncertainties on both, growth as well as inflation.