Monetary Policy Committee (MPC) Review: Policy Rate Increased by 50 BPS

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Monetary Policy Committee (MPC) Review: Policy Rate Increased by 50 BPS

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) Friday decided unanimously to increase the policy repo rate by 50 basis points to 5.4%.  Consequently, the standing deposit facility (SDF) rate stands adjusted to 5.15 per cent; and the marginal standing facility (MSF) rate and the Bank Rate to 5.65%.

Withdrawal of accommodation stance: The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth, RBI Governor Shaktikanta Das said in his monetary policy statement.

 

Balancing inflation with growth

Elaborating the MPC’s rationale for its decisions on the policy rate and the stance, he said against the prevailing adverse global environment, the MPC noted that domestic economic activity was resilient and progressing broadly along the lines of the June resolution of the MPC.

“Consumer price inflation has eased from its surge in April but remains uncomfortably high and above the upper threshold of the target. Inflationary pressures are broad-based and core inflation remains at elevated levels,” he said.

“The volatility in global financial markets is impinging upon domestic financial markets, including the currency market, thereby leading to imported inflation,” he added.

Factoring inflation: Das said with inflation expected to remain above the upper threshold in Q2 and Q3, the MPC stressed that sustained high inflation could destabilise inflation expectations and harm growth in the medium term.

“The MPC, therefore, judged that further calibrated withdrawal of monetary accommodation is warranted to keep inflation expectations anchored and contain the second-round effects,” he said.

“Accordingly, the MPC decided to increase the policy repo rate by 50 basis points to 5.4%. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” he added.

GDP projection: Taking many factors into account the RBI has retained the real GDP growth projection for 2022-23 at 7.2%, with Q1 at 16.2%; Q2 at 6.2%; Q3 at 4.1%; and Q4 at 4.0%, with risks broadly balanced. Real GDP growth for Q1:2023-24 is projected at 6.7%.

Stating that June 2022 was the sixth consecutive month when headline CPI inflation remained at or above the upper tolerance level of 6%, the governor said that assuming normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 105 per barrel, inflation is projected at 6.7% in 2022-23, with Q2 at 7.1%; Q3 at 6.4%; and Q4 at 5.8%, with risks evenly balanced. CPI inflation for Q1:2023-24 is projected at 5.0%.


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