RBI Monetary Policy: Central Bank Hikes Repo Rate By 25 Bps To 6.5%, FY24 GDP Growth At 6.4%

Governor Das said the MPC decided 4:2 vote to remain focused on withdrawal of accommodative policy; the RBI's six-member panel commenced review on Monday after the Budget was presented last week

India's CPI inflation seen at 5.3 per cent, RBI Governor Shaktikanta Das announced on Wednesday.

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The Reserve Bank of India’s (RBI's) Monetary Policy Committee (MPC), headed by Governor Shaktikanta Das, on Wednesday announced a 25 basis point (bps) hike in repo rate to 6.5 per cent. Maintaining an accommodative stance, the central bank maintained its commitment to fight inflation.

In his speech, Das said the MPC decided 4:2 vote to remain focused on withdrawal of accommodative policy. "The global economic outlook doesn't look as grim now as it did a few months ago, growth prospects in major economies have improved while inflation is on a descent though inflation still remains on well-above target in major economies," he said, while adding "Rate hike of 25 bps is considered appropriate at this juncture, monetary policy to remain agile, alert to inflation."

He said that the RBI MPC projected India's GDP growth at 6.4 per cent for 2023-2024.

The governor said that inflation is projected at 6.5 per cent for the current financial year 2022-23. "On the assumption of a normal monsoon, CPI inflation is projected at 5.3 per cent for 2023-24," Das said.

The governor said that the RBI sees GDP growth in April-June 2023 at 7.8 per cent versus 7.1 per cent earlier, while in July-September 2023 at 6.2 per cent versus 5.9 per cent. In October-December 2023 GDP growth is seen at 6 per cent and in January-March 2024 GDP growth is viewd at 5.8 per cent.

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On inflation part, he said that the retail inflation is expected to average 5.6 per cent in the 4th quarter of 2023-24. "Core inflation remains sticky," he pointed out. The CPI inflation seen at 5.3 per cent in FY24, Das said. The inflation forecasts assume the price of India's crude oil basket at $95 per barrel.

Das announced that the RBI proposes lending, borrowing of G-Sec. "Systemic liquidity increase going ahead will be moderated by TLTRO, LTRO maturities." He mentioned government bond market timings restored to 9 am to 5 pm.

India's current account deficit to moderate in second half of 2022-23 and remain eminently manageable, the governor mentioned during his MPC speech.

Das, in his announcements, said inbound travellers to India will be allowed to use UPI for merchant payments while they are here in country; to start with G20 arrivals at select airports. 

According to the governor, Indian rupee remained least volatile among its Asian peers in 2022 and so far this year.

Naveen Kulkarni , chief investment officer, Axis Securities PMS, said, "The RBI’s 25 bps repo rate hike was not surprising. The rate hike is a reflection of the easing inflation, which has been below the regulator’s tolerance band with a moderation of 105 bps in the last two months. There could be another rate hike in the coming months before a pause on the interest rates. The RBI has increased its growth estimates to 7 per cent vs 6.8 per cent earlier for FY23, while FY24 growth is likely to remain at 6.4 per cent. Similarly, inflation might continue to tread downward with a revised estimate of 6.5 per cent for FY23 vs 6.7 per cent earlier and improve further to 5.3 per cent for FY24. As per the latest print on 27 January, while credit growth was healthy on a YoY basis, it de-grew marginally on a fortnightly basis, probably hinting at a reluctance to borrow at higher rates. However, easing inflationary pressures should support credit growth. While NIMs have moved with a positive bias so far for most banks, with deposit rates now catching up, banks are likely to witness margin compression going into FY24, despite healthy credit growth."

The six-member RBI panel commenced its MPC review on Monday after the Union Budget 2023 was presented by Finance Minister Nirmala Sitharaman on February 1 that aimed at pushing growth.

Most experts also believed that the RBI might opt for a 25 basis points hike in the key interest rate as the retail inflation has shown signs of moderation and remains below the bank's 6 per cent upper tolerance level, besides the projected slowdown in GDP growth in the next fiscal starting April.

The central bank, which is battling to ensure that retail inflation remains at 4 per cent with a margin of 2 per cent, couldn’t maintain the inflation rate below 6 per cent for three consecutive quarters beginning January 2022. Even as retail inflation based on the Consumer Price Index (CPI) has shown signs of moderation in November and December, the regulator fell below the its upper tolerance level of 6 per cent.

In the December MPC announcement, the RBI Governor had raised the repo rate by 35 bps. In 2022 alone, the repo rate was hiked by 225 bps from 4 per cent in January to 6.25 per cent in December.