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Faced with the challenge of elevated retail inflation and a “storm” arising from aggressive monetary policy actions of advanced economy central banks, the six-member monetary policy committee (MPC) decided by a majority of 5 to 1 to up the policy repo rate by 50 basis points as well as remain focused on withdrawal of accommodation.
The latest hike, which was widely expected, takes the repo rate to 5.90 per cent from 5.40 per cent earlier. With this, the MPC has cumulatively raised the repo rate by 190 bps (40 bps in May, followed by 50 bps each in the following three meetings) since May 2022.
RBI Governor Shaktikanta Das said even as the nominal policy repo rate has been raised by 190 bps so far, the policy rate adjusted for inflation trails the 2019 levels.
“In the last two and half years, the world has witnessed two major shocks — the Covid-19 pandemic and the conflict in Ukraine. Now, we are in the midst of a third major shock, a storm, arising from aggressive monetary policy actions and even more aggressive communication from advanced economy (AE) central banks.
“The necessity of such actions is driven by their domestic considerations, but in a highly integrated global financial system, they inevitably cause negative externalities through global spillovers,” Das said.
RBI Governor Shaktikanta Das | Photo Credit: PUNIT PARANJPE
Domestic factors
The Governor emphasised that the MPC’s decision continues to be guided and will be guided by domestic factors. The decisions are based on the twin-objectives of inflation and growth, with primacy being given to price stability, followed by the necessity to keep growth in mind, he said.
The Governor underscored that India’s growth remains resilient. However, he observed that domestic inflation is high (hovering around 7 per cent and RBI expects it to remain elevated at around 6 per cent in H2 FY23), but it is expected to moderate.
He also highlighted that the liquidity in the banking system continues to be in surplus and henceforth on the liquidity front, only 14-day VRRR (variable rate reverse repo) auctions will be conducted. And, RBI will continue with its two-way fine-tuning operations for injection as well as absorption of liquidity.
Meanwhile, the RBI has cut the real GDP growth projection for 2022-23 from 7.2 per cent to 7 per cent even as it retained retail inflation projection at 6.7 per cent in 2022-23.
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