Finance
The Reserve Bank of India’s Monetary Policy Committee (MPC) raised the repo rate by 50 basis points to 5.40 percent on Friday, citing continued upside risks to inflation.
The SDF rate is now 5.15 percent, and the MSF rate is 5.65 percent. The SDF represents the lower band of the interest rate corridor, while the MSF represents the upper band.
On Monday, a poll conducted by the ‘Business Standard’ predicted a 35-50 basis-point increase in the repo rate at this week’s policy statement. The benchmark policy repo rate has now reached its highest level since August 2019.
The MPC stated this morning, as it did in its June policy statement, that the rate-setting panel was focused on the withdrawal of accommodation. Given the MPC’s policy-tightening stance, some economists have called for a shift to neutral or calibrated tightening.
The latest rate hike brings the total number of rate increases since May to 140 basis points. Accounting for the SDF’s introduction at a higher rate than the reverse repo rate in April, effective rate hikes in 2022 have totaled 180 basis points.
“Spillovers from geopolitical shocks are imparting considerable uncertainty to the inflation trajectory. More recently, food and metal prices have come off their peaks,” said the MPC’s statement.
“International crude oil prices have eased in recent weeks but remain elevated and volatile on supply concerns even as the global demand outlook is weakening. The appreciation of the US dollar can feed into imported inflation pressures.”
Consumer Price Index (CPI) inflation has remained above the upper band of the Reserve Bank of India’s mandated 2-6 percent range for six consecutive months, through June 2022.
In June, the inflation rate was 7.01 percent. The RBI’s medium-term CPI inflation target is 4%.
After Russia’s invasion of Ukraine in late February caused a sharp rise in global commodity prices, the risks to domestic inflation increased significantly.
With risks evenly balanced, the RBI maintained its CPI inflation forecast of 6.7% for the current fiscal year. The CPI forecast assumes a crude oil price of $105 per barrel for the Indian basket.
CPI inflation is expected to be 7.1% in July-September, 6.4% in October-December, and 5.8% in January-March. The price index is expected to be 5% in the first quarter of 2023-24.
According to the RBI’s forecast, the MPC is likely to fail to meet its mandate of ensuring that average inflation does not remain above the target band for more than three consecutive quarters. In the event of a failure, the RBI must explain itself to the government.
The MPC maintained its 7.2 percent real GDP growth forecast for the current fiscal year on Friday. GDP growth is expected to be 6.7% in the first quarter of the next fiscal year.
Bond prices fell sharply following the policy statement, with the 10-year benchmark bond yield rising 10 basis points to 7.26 percent. The bond market had hoped for a 35-bps rate hike, as well as indications that the RBI might temper future rate hikes.
The rupee rose sharply against the US dollar, closing at 79.07 per dollar, up from 79.47 per dollar at the previous close on Thursday.
Source:BS
