RBI raises the key lending rate by 35 basis points and projects 6.8% GDP growth

After the Monetary Policy Committee meeting, the Governor of the RBI announced the increase.

The policy repo rate was raised by 35 basis points (bps) to 6.25% on Wednesday by the Reserve Bank of India’s Monetary Policy Committee (MPC), and the standing deposit facility was lifted to 6%.

According to RBI Governor Shaktikanta Das, the majority opinion of the MPC was to abandon the accommodative posture.

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According to projections, CPI inflation will be 6.7% this year, 5% in the first quarter of 2023–24, and 5.4% in the second, assuming a typical monsoon. The Governor stated that the priority is still on controlling inflation and there won’t be a break in our efforts to lower inflation, first below 6% and subsequently closer to the 4% target.

The GDP forecast for 2022–2023 was also slightly decreased by the central bank’s main committee, dropping to 6.8% after the third quarter’s 4.4% increase. “India will still be among the fastest-growing major economies in the world and that is something that I think needs to be kept in mind,” Mr. Das said.

Even as several other currencies fell, the rupee increased by 3.2% in real terms. It’s impossible for the U.S. Fed’s monetary tightening to continue indefinitely; the terminal rate is unknown. The tide will change when it stops, according to Mr. Das.

The third quarter’s economic activity remained steady. Domestic air passenger traffic growth and sales of passenger cars both continued to expand quickly, and rural demand is improving. From April to November, non-food bank loan increased by 10.6 lakh crore, compared to 1.9 lakh crore the previous year.

Since merchandise exports decreased by nearly 12% in October, the negative impact of net external demand was much more pronounced. Agriculture, which continues to be resilient in terms of supply, has had a robust start to the Rabi sowing season with a 6.8% rise in area seeded as of December 2 of this year.

In November, the PMI for manufacturing and services increased as well. The Governor stated that the November PMIs for both manufacturing and services are among the highest in the globe.

According to him, strong growth in the production of steel and cement indicates that construction activity is picking up after the monsoon.

Announcing the hike he said, “As we come to the end of yet another turbulent year, mixed signals are emerging from the geopolitical situation and financial market volatility. The Ukraine invasion by Russia is a black swan event that severely affected energy and food prices around the world.”

Despite a slight decline in costs, inflation is still very high. No nation is immune to the negative consequences of these severe shocks, but emerging market economies that depend on imported food, commodities, and fuel are the hardest hurt, according to him.

“Supply chains are being redrawn on considerations of geopolitics which is now leading to terms like ‘friendshoring’. Our financial system remains robust and stable and corporates are healthier than before the crisis. Bank credit has been growing at double digits for eight months now. India remains a bright spot in the world, yet inflation remains high,” he added.

With the typical winter softening and a plentiful Rabi crop, food inflation is likely to decrease in the future; nonetheless, pressure points still exist in the pricing of grains, spices, and milk, according to the expert.

Although it moderated to 6.8% in October as anticipated, consumer price inflation is still above target. Core inflation has become sticky. Although the rate of headline inflation is anticipated to decline over the next few months, the governor predicted that it would continue to rise through the first quarter of 2023–2024.

The MPC believed that additional adjustments to monetary policy were necessary to control core inflation, maintain anchored inflation expectations, and reduce second-round consequences (of inflation), he continued.

The MPC adopted a comprehensive approach for determining the stance of the monetary policy in relation to inflation. Even after accounting for inflation, liquidity is still accommodating. The MPC chose to keep withdrawing accommodation since the overall monetary and liquidity circumstances are still accommodative, the Governor stated.

The overall CPI price momentum is quite strong. Uncertain weather events pose additional risks to the outlook. He added that the future of the US dollar and foreign inflation is likewise unclear.

Overall system liquidity continues to be in excess. They are expected to get better in the coming months because of things like a reduction in the amount of cash in circulation after the holidays and increased forex inflows brought on by the return of foreign portfolio investors, the official noted.

Technology, business services, and travel continue to contribute significantly to the healthy expansion of service exports. According to him, India’s remittances will increase from $89,4 billion in 2021 to over $100 billion this year. We have confidence in the current account deficit because the net balances in services and remittances continue to be significantly in surplus, partially balancing the trade deficit.

According to him, foreign portfolio flows, driven by equity, have returned to the Indian market and FDI flows are stable.

“UPI has emerged as the best payment system anywhere in the world. It has been our constant endeavor to try and deepen the reach in India. The UPI currently includes functionality to undertake recurring payments and single-block payments. It is now being enhanced to allow customers to block funds in their accounts for multiple payments of specific nature,” the Governor said.

We have a fantastic opportunity to shape global outcomes thanks to India’s G20 chairmanship, he continued.

In an effort to contain inflation, the RBI raised the main policy rate (repo) by 50 basis points on September 30. It was the third 50 bps increase in a row. The central bank had previously increased the repo rate by 40 bps in May, 50 bps in June, and 50 bps in August prior to the increase in September.