In highest hike since 2019, RBI raises key rate by 50 bps to 5.40 per cent; Governor Shaktikanta Das raises inflation fears

The RBI expects growth in the first quarter of the current fiscal at 16.2 per cent, which will eventually taper to 4 per cent. Das cautioned that there are risks from the ongoing Russia-Ukraine war.

Published: 05th August 2022 10:25 AM  |   Last Updated: 05th August 2022 12:45 PM   |  A+A-

RBI Governor Shaktikanta Das

RBI Governor Shaktikanta Das (Photo | PTI)

By Online Desk

NEW DELHI: The RBI on Friday retained the inflation forecast for FY23 at 6.7 per cent amid an uncertain price trajectory on "geopolitical shocks" and on the hope that inflationary pressures would ease with a pick-up in Kharif sowing and supply chain improvements.

In its previous monetary policy review in June, it had projected retail inflation for 2022-23 at 6.7 per cent, higher than 5.7 per cent forecast in April.

The six-member Monetary Policy Committee (MPC) unanimously decided to raise the benchmark repo rate by a steep 50 basis points to 5.40 per cent with immediate effect to tame inflation while supporting growth.

Repo is the key rate at which the RBI lends short-term money to banks.

One basis point is equivalent to one-hundredth of a percentage point.

RBI Governor Shaktikanta Das said inflation in the second and third quarters of the current fiscal year is expected to remain above the upper tolerance level of 6 per cent.

The central bank has been mandated to keep retail inflation at 5 per cent with a bias of 2 per cent on the either side.

Spillovers from geopolitical shocks are imparting considerable uncertainty to the inflation trajectory, even as food and metal prices have come off their peaks recently, Das said while announcing the MPC meeting outcome.

He said global crude oil prices have eased in recent weeks, however, they remain elevated and volatile.

There are supply-related concerns amid a weakening of the global demand outlook.

"Taking into account these factors and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of USD 105 per barrel, the inflation projection is retained at 6.7 per cent in 2022-23," Das said.

For the second quarter of 2022-23, the RBI has projected inflation at 7.1 per cent; Q3 at 6.4 per cent.

It is, however, expected to come under control at 5.8 per cent in Q4.

Das said risks are evenly balanced with respect to the inflationary outlook.

The RBI expects the Consumer Price Index (CPI)-based retail inflation to come down to 5 per cent in the first quarter of 2023-24.

Sowing of Kharif crop has picked up in the ongoing monsoon, which augurs well for the domestic price outlook, RBI said.

It will also boost rural consumption.

"The shortfall in paddy sowing, however, needs to be watched closely, although stocks of rice are well above the buffer norms," Das said.

He also expects prices of edible oil to soften further on the back of government intervention as well as ease in supply from international producers.

In June, retail inflation stood at 7.01 per cent.

Noting that inflation has remained above 7 per cent since the beginning of current fiscal year, Das said food inflation has registered some moderation, especially with the softening of edible oil prices, and deepening deflation in pulses and eggs.

"Cost pressures are, however, expected to get increasingly transmitted to output prices across manufacturing and services sectors," he said.

Declaring that the Monetary Policy Committee has taken a unanimous decision to raise the benchmark lending rate by 50 bps to 5.40 per cent, RBI Governor Shaktikanta Das on Friday said that the IMF has revised downwards economic growth projection and expressed the risk of recession.

The repurchase rate was raised by 50 basis points to lift the interest rate to the pre-pandemic level.

The 5.40 per cent repo rate was last seen in August 2019.

Announcing the rate hike, RBI Governor Shaktikanta Das did not offer any indication of a change in the stance or a possible pause in the next policy due in late September.

The Reserve Bank of India's six-member rate-setting panel voted unanimously on the rate hike decision while sticking to its resolve to withdraw the accommodative stance.

It, however, retained GDP growth projection at 7.2 per cent for the current fiscal ending March 31, 2023, and kept the inflation outlook for the year unchanged at 6.7 per cent.

"Inflationary pressures are broad-based and core inflation remains elevated. Inflation is projected to remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23, entailing the risk of destablishing inflation expectations and triggering second-round effects," he said.

The RBI targets inflation at 2-6 per cent.

June was the sixth consecutive month when headline CPI inflation remained at or above the upper tolerance level of 6 per cent.

Stating that there has been some let-up in global commodity prices, particularly in prices of industrial metals, and some softening in global food prices, the governor said domestic edible oil prices are expected to soften further on the back of improving supplies from key producing countries.

Further, the advance of the southwest monsoon is by and large on track and kharif sowing has picked up in recent weeks.

"The shortfall in kharif sowing of paddy, however, needs to be watched closely, although buffer stocks are quite large. Household inflation expectations have eased but they still remain elevated," he said.

The central bank surprised markets with a 40 bps hike at an unscheduled meeting in May, followed by a 50 bps increase in June, but prices have shown little sign of cooling off yet.

The latest increase mirrors the US Federal Reserve-led global tightening of interest rates to rein in spiraling prices, caused by supply snarls and energy price shocks following Russia's invasion of Ukraine.

The MPC believes "calibrated withdrawal of monetary policy accommodation is warranted to keep inflation expectations anchored and contain the second round effects," Das said.

On the rupee depreciating against the US dollar, he said at a 4.7 per cent decline, the rupee fared much better than several reserve currencies as well as many of its EME and Asian peers.

"The depreciation of the Indian rupee is more on account of the appreciation of the US dollar rather than weakness in macroeconomic fundamentals of the Indian economy. Market interventions by the RBI have helped in containing volatility and ensuring the orderly movement of the rupee," he said.

He said the RBI will remain watchful and maintain the stability of the rupee.

The Indian economy has been impacted by the global economic situation and is grappling with the problem of high inflation.

"Nevertheless, with strong and resilient fundamentals, India is expected to be amongst the fastest growing economies during 2022-23 according to the IMF, with signs of inflation moderating over the course of the year," he said.

The financial sector is well capitalised and sound while the foreign exchange reserves - supplemented by net forward assets - provide insurance against global spillovers.

"Our umbrella remains strong," he said.

"IMF has revised downwards economic growth projection and expressed risk of recession. The Indian economy has been grappling with high inflation," he said.

"India facing USD 13.3 billion capital outflow in last few months," Das added while mentioning that the financial sector remains well capitalised.

"India's forex reserves provide insurance against global spillovers. Consumer price inflation remains uncomfortably high; inflation expected to remain above six per cent," he said.

"MPC decides to focus on the withdrawal of accommodative policy stance to check inflation. Bank credit growth has accelerated 14 pc as against 5.5 per cent a year ago. Domestic economic activity showing signs of broadening; rural demand shows mix trend," he said while declaring about the central bank retaining its economic growth projection at 7.2 per cent for the current fiscal

"Indian economy faces headwinds from global factors like geo-political risks. Edible oil prices are likely to soften further. Inflation projection for FY23 retained at 6.7 per cent on the assumption of normal monsoon and crude oil at USD 105/barrel," he said.

"Rise in term deposit rates should increase liquidity for the financial sector. Surplus liquidity in the banking system has come down to Rs 3.8 lakh crore, from Rs 6.7 lakh crore in April-May. The rise in term deposit rates should increase liquidity for the financial sector," he said further.

"Decline in rupee is more due to appreciation of USD than on account of weakness in the Indian economy. The rupee has moved in an orderly fashion, depreciating 4.7 per cent till August 4; RBI remains watchful of INR movement," he said.

"Rise in term deposit rates should increase liquidity for the financial sector. Surplus liquidity in the banking system has come down to Rs 3.8 lakh crore, from Rs 6.7 lakh crore in April-May," Das said.

Saying that the FDI inflows improved to USD 13.6 billion in the first quarter of this fiscal, against USD 11.6 billion in the corresponding period last year, he said, "India's forex reserves remain fourth largest globally."

Key points from the RBI Governor's address:

  • With the latest hike, the repo rate or the short-term lending rate at which banks borrow has crossed the pre-pandemic level of 5.15 per cent.

  • This is the third consecutive rate hike after a 40 basis point in May and 50 basis point increase in June.

  • In all, the RBI has raised the benchmark rate by 1.40 per cent since May this year.

  • All six members of the Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously voted for the rate hike.

  • The Consumer Price Index (CPI) based inflation, which RBI factors in while fixing its benchmark rate, stood at 7.01 per cent in June.

  • Retail inflation has been ruling above the RBI's comfort level of 6 per cent since January this year.

  • Inflation based on the Wholesale Price Index (WPI) remained in double-digit for 15 months in a row.

  • The WPI reading was at 15.18 per cent in June.

  • The latest RBI action follows the Bank of England raising the rate by 50 basis points, the biggest hike in 27 years, to 1.75 per cent.

  • Last month, the US Federal Reserve effected its second consecutive 0.75 percentage point interest rate increase, taking its benchmark rate to a range of 2.25-2.5 per cent.

(With PTI Inputs)


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