The RBI Monetary Policy Committee (MPC) on Wednesday continued with interest rate hikes as it raised the repo rate by 35 bps to 6.25%. Reserve Bank Governor Shaktikanta Das emphasized that India’s economic growth at 6.8% has been robust and amongst one of the best in the world. With a good monsoon, increase in manufacturing activity and robust services growth, economic growth outlook looks stable. However, the MPC still cut FY23 GDP growth forecast to 6.8%. Das emphasised that the policy has ‘Arjuna’ eye on inflation, and is focused on withdrawal of accommodation while being committed to ensuring adequate liquidity to support growth. Given the continued global headwinds, RBI ensured that it will remain nimble, and take action wherever warranted.
Highlights from RBI Monetary Policy
Rate hike continues: The Monetary Policy Committee (MPC) raised policy repo rate by 35 basis points to 6.25%, with immediate effect. Consequently, the standing deposit facility (SDF) rate stands adjusted to 6.00%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
FY23 growth forecast cut: The real GDP growth for 2022-23 is projected at 6.8%, down from 7% projected earlier. GDP growth is seen at 4.4% and 4.2% for Q3 and Q4 respectively. The risks are evenly balanced, according to the MPC. Real GDP growth is projected at 7.1% for Q1 of 2023-24, and 5.9% for the subsequent quarter. Despite the downward revision, India will still be among the fastest growing major economies in the world, said RBO governor Shaktikanta Das.
Inflation forecast unchanged: Food inflation is likely to moderate going forward with the usual winter softening and the likelihood of a bountiful rabi harvest. However, pressure points remain in the form of prices of cereals, milk and spices in the near-term. Overall, the CPI price momentum remains high, and risks from adverse weather events add to uncertainty in the outlook. Assuming an average crude oil price (Indian basket) of $100 per barrel, headline inflation is projected at 6.7% in FY23, with Q3 at 6.6% and Q4 at 5.9%. CPI inflation for the subsequent two quarters is projected at 5.0% and 5.4% respectively.
Focus on withdrawal of accommodation: System liquidity remains in surplus with an average daily absorption under the liquidity adjustment facility (LAF) of Rs 1.6 lakh crore in November. Since then, it has risen to Rs 2.6 lakh crore as on 5 December. “The overall monetary and liquidity conditions remain accommodative and hence, the MPC decided to remain focused on withdrawal of accommodation,” said RBI Governor.
RBI ready to conduct LAF operations: The Reserve Bank believes that in the period ahead, liquidity conditions are likely to improve due to several factors which would include moderation in currency in circulation in the post-festival period, pick up in government expenditure in the last few months of FY23 and higher forex inflows due to the return of portfolio investors. “The Reserve Bank remains nimble and flexible in its liquidity management operations to meet the requirements of the productive sectors of the economy. Therefore, although the Reserve Bank remains in absorption mode, we are ready to conduct LAF operations that inject liquidity as may be needed through our main operations,” Shaktikanta Das said.
Money market hours restored: As part of a gradual move towards normal liquidity operations, the RBI MPC has decided to restore market hours – from 9.00 AM to 5.00 PM – in respect of call/notice/term money, commercial paper, certificates of deposit and repo in corporate bond segments of the money market as well as for rupee interest rate derivatives.
Hedging of Gold in the International Financial Services Centre (IFSC): India residents are currently not permitted to hedge their exposure to gold price risk in overseas markets. With a view to providing greater flexibility to these entities to hedge the price risk of their gold exposures, resident entities will now be permitted to hedge their gold price risk on recognised exchanges in the IFSC. “This measure will benefit importers/exporters of gold such as jewellers and industries which use gold as an intermediate or raw material,” Shaktikanta Das said.