In a second round of policy rate hike in two months, the RBI’s monetary policy committee (MPC) has unanimously voted to raise repo rates by 50 basis points, taking it to 4.9 per cent. The MPC took into account the accentuating global crisis from the war in Ukraine. RBI governor Shaktikanta Das said that the resultant supply chain disruptions have led to ‘globalisation of inflation’. As a result, the six-member rate-setting committee also decided to raise domestic annual inflation expectations to 6.7 per cent from 5.7 per cent earlier. This means inflation is projected to remain above the RBI’s upper tolerance limit of 6 per cent in this financial year.
According to the monetary policy framework agreement between the central bank and the government, if average inflation does not stay within the 2-6 per cent range for three consecutive quarters, it is seen as a failure of the RBI. “Inflationary pressures have become broad-based and remain largely driven by adverse supply shocks. There are growing signs of a higher pass-through of input costs to selling prices. The MPC noted that inflation is likely to remain above the upper tolerance band of 6 per cent through the first three quarters of 2022-23,” RBI Governor Shaktikanta Das said in the statement.
Here are key takeaways from the RBI monetary policy’s June meeting:
- RBI raises benchmark rates by 50 basis points
RBI’s MPC met between June 6 to June 8 and voted unanimously to increase the policy repo rate by 50 basis points to 4.90 per cent with immediate effect. Consequently, the standing deposit facility (SDF) rate has been raised to 4.65 per cent; and the marginal standing facility (MSF) rate and the Bank Rate to 5.15 per cent. The MPC also unanimously voted to remain focused on withdrawal of accommodation. Shaktikanta Das said the RBI will ensure that inflation remains within the target going forward, while supporting growth. “The MPC also recognised that sustained high inflation could unhinge inflation expectations and trigger second round effects. It, therefore, judged that further monetary policy measures are necessary to anchor the inflation expectations,” Das said.
- RBI ups inflation projects by 100 basis points
The central bank acknowledged that based on the last few readings it is seen that the inflation has become broad-based and has seeped into major items. Taking into account this ‘globalisation of inflation’ especially stemming from the supply chain crisis, the RBI raised inflation projections for FY 2023 to 6.7 per cent. For FY 2023, Das said inflation projections for Q1 at 7.5 per cent; Q2 at 7.4 per cent; Q3 at 6.2 per cent; and Q4 at 5.8 per cent, assuming that there is a normal monsoon this year and average crude oil price are contained at $105 per barrel. The governor, however added, that inflation projections do not take into account Wednesday’s policy rate hike decision.
- RBI reiterates growth outlook
The Reserve Bank of India’s MPC reiterated its growth outlook for FY 2023 at 7.2 per cent. This comes a day after the World Bank, following suit of major financial institutions, decided to cut India’s growth projections to 7.5 per cent. The central bank took into account improving domestic conditions as well as uncertain global conditions but decided to keep the projections unchanged. It sees real GDP growth for Q1, Q2, Q3 and Q4 of FY 2023 at 16.2 per cent; 6.2 per cent; 4.1 per cent; and 4.0 per cent, respectively with risks broadly balanced.
- Domestic conditions show signs of improvement
Shaktikanta Das said India’s domestic conditions are improving at pace despite the pandemic and the spillovers of Russia-Ukraine war. However the global conditions are challenging for India alongside other major economies. Das said the forecast of normal south-west monsoon should boost kharif sowing and agricultural output, the rebound in contact-intensive services is expected to sustain urban consumption, and said that early survey findings suggest that the business sentiment in the country remains upbeat. At the same time, the negative spillovers from geopolitical tensions; elevated international commodity prices; rising input costs; tightening of global financial conditions; and slowdown in the world economy continue to weigh on the outlook, he added.
- E-mandates, linking UPI to credit card and other announcements
RBI Governor Shaktikanta Das also made a slew of announcements apart from the monetary policy. For starters, the RBI has raised the limit for e-Mandates on cards for recurring payments. Das announced that to facilitate recurring payments like subscriptions, insurance premia, education fee, etc. of larger value, the limit for e-mandates has been raised to Rs 15,000 per transaction from Rs 5,000 earlier. RBI on cooperative banks. In a move to provide convenience in making digital payments, the RBI has allowed the linking of UPI (Unified Payments Interface) with RuPay credit cards, which was earlier only limited through debit cards. The process is expected to begin with Rupay credit cards and will expand further.
