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Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday announced a repo rate hike of 50 basis points (bps) following the two-day Monetary Policy Committee (MPC) meeting. With this, the repo rate now stands at 5.90 per cent. This is RBI MPC’s fourth consecutive rate hike in this financial year.
“The MPC decided by a majority of 5 out of 6 to increase the policy repo rate by 50 basis points to 5.9 per cent with immediate effect,” Das said.
The repo rate is usually hiked to reduce the liquidity in the economy and to contain inflation.
Owing to slowing economic growth, debt mounting and sharp currency depreciation, the Gross Domestic Product (GDP) growth forecast for the current financial year (FY23) was slashed to 7 per cent from 7.2 per cent earlier.
Das also announced that RBI will continue to withdraw its accommodative stance.
“The MPC also decided by a majority of 5 out of 6 members to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth,” Das said. “This action will support medium-term growth prospects”, he added.
ALSO READ: RBI Monetary Policy: Repo rate up by 50bps; here’s how it will impact you
The inflation target for the current year, however, was retained at 6.7 per cent. The inflation will remain above the RBI’s upper tolerance limit of 6 per cent in the second half of FY23.
The Consumer Price Index (CPI)-based inflation, according to Das, is only expected to fall below 6 per cent to 5.8 per cent in the last quarter of FY23. For Q1FY23, the CPI inflation target was placed at 5 per cent.
“The inflation projection is retained at 6.7 per cent in 2022-23, with Q2 at 7.1 per cent, Q3 at 6.5 per cent, and Q4 at 5.8 per cent, with risks evenly balanced. CPI inflation is projected to further reduce to 5 per cent in Q1FY24,” Das said.
Why was the repo rate hiked?
“Financial conditions are tightening and recession fears are mounting. Inflation continues to persist at alarmingly high levels across jurisdictions. The enduring effects of the pandemic and the geo-political conflict are manifesting in demand-supply mismatches of goods and services,” Das said in his speech.
“Central banks are charting new territory with aggressive rate hikes, even if it entails sacrificing growth in the near-term. In this milieu, nervous investor sentiments have triggered a flight to safety,” he further added.
ALSO READ: RBI policy: Repo rate hiked by 50 bps to 5.9%; FY23 GDP forecast cut to 7%
He also said that emerging market economies (EMEs), are confronted with challenges of slowing global growth, elevated food and energy prices, spillovers from advanced economy policy normalisation, debt distress and sharp currency depreciations. Thus, the MPC decided to hike the repo rate.
What do the experts say?
“The overall indicators and today’s policy action indicates that India is better placed to handle future economic challenges, while the world is on verge of a possible recession,” Jyoti Prakash Gadia, MD of advisory firm Resurgent India said.
Das also announced the withdrawal of forward guidance and said that it may destabilise markets in a “highly uncertain environment”.
“What is interesting is the governor’s comment on doing away with forward guidance, given that the same would be counter-productive in a tightening cycle,” Vivek Iyer, partner for Financial Services, Grant Thornton Bharat said.
“It is also reflective of cautious approach by RBI to keep calibrating its approach as the external situation evolves,” Iyer added
RBI added that their actions will be carefully calibrated to the incoming data and evolving scenario without “being constrained by conventional or any textbook approach to policy making.
“On the international front, RBI’s assurance to continue its judicious intervention to ensure stability in the foreign exchange market is a welcome sign to curb uncertainties and support long-term revival and resilience of the economy,” Gadia added.
For market experts, especially from real estate, the RBI’s stance on inflation was troubling.
“It is a little worrisome as the inflation trajectory remains uncertain,” Kush Ghodasara, an independent market expert said.
“The real estate sector had started seeing gradual recovery across key property markets, driven primarily by end users and this decision will have adverse impact for the interest rate sensitive sector,” Ramani Sastri, chairman & MD, Sterling Developers said.
For Nifty50, “keeping up above the 17,000-mark is extremely crucial,” Ghodasara added.
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