RBI hikes repo rate by 50 bps to 4.90% to keep inflation expectations anchored

Mumbai, June 8, 2022

The Reserve Bank of India (RBI) today increased its key policy repo rate by 50 basis points (bps) to 4.90 per cent with immediate effect, stating that there was a need for calibrated monetary policy action to keep inflation expectations anchored and restrain the broadening of price pressures.

Consequently, the standing deposit facility (SDF) rate stood adjusted to 4.65% and the marginal standing facility (MSF) rate and the Bank Rate to 5.15%.

At its three-day meeting which concluded here today, the Monetary Policy Committee (MPC) of the RBI also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," the Monetary Policy Statement, 2022-23 and resolution of the MPC said.

The MPC said it had taken the decision on the basis of an assessment of the current and evolving macroeconomic situation.

The statement said the tense global geopolitical situation and the consequent elevated commodity prices imparted considerable uncertainty to the domestic inflation outlook.

"The restrictions on wheat exports should improve the domestic supplies but the shortfall in the rabi production due to the heat wave could be an offsetting risk. The forecast of a normal south-west monsoon augurs well for the kharif agricultural production and the food price outlook.

"Edible oil prices remain under pressure on adverse global supply conditions, notwithstanding some recent correction due to the lifting of export ban by a major supplier. Consequent to the recent reduction in excise duties, domestic retail prices of petroleum products have moderated. International crude oil prices, however, remain elevated, with risks of further pass-through to domestic pump prices. There are also upside risks from revisions in the prices of electricity.

"Early results from manufacturing, services and infrastructure sector firms polled in the Reserve Bank’s surveys expect further input and output price pressures going forward.

"Taking into account these factors, and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 105 per barrel, inflation is now projected at 6.7 per cent in 2022-23, with 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, with risks evenly balanced," the statement said.

The MPC noted that the recovery in domestic economic activity is gathering strength.

"Rural consumption should benefit from the likely normal south-west monsoon and the expected improvement in agricultural prospects. A rebound in contact-intensive services is likely to bolster urban consumption, going forward.

"Investment activity is expected to be supported by improving capacity utilisation, the government’s capex push, and strengthening bank credit. Growth of merchandise and services exports is set to sustain the recent buoyancy. Spillovers from prolonged geopolitical tensions, elevated commodity prices, continued supply bottlenecks and tightening global financial conditions nevertheless weigh on the outlook.

"Taking all these factors into consideration, the real GDP growth projection for 2022-23 is retained at 7.2 per cent, with Q1 at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4.0 per cent, with risks broadly balanced," the resolution said.

The MPC pointed out that the inflation risks flagged in its April and May resolutions of the MPC had materialised.

"The projections indicate that inflation is likely to remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23. Considerable uncertainty surrounds the inflation trajectory due to global growth risks and geopolitical tensions. The supply side measures taken by the government would help to alleviate some cost-push pressures. At the same time, however, the MPC notes that continuing shocks to food inflation could sustain pressures on headline inflation.

"Persisting inflationary pressures could set in motion second round effects on headline CPI. Hence, there is a need for calibrated monetary policy action to keep inflation expectations anchored and restrain the broadening of price pressures.

"Accordingly, the MPC decided to increase the policy repo rate by 50 basis points to 4.90 per cent. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth," the statement said.

All members of the MPC – Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and RBI Governor Shaktikanta Das – unanimously voted to increase the policy repo rate by 50 basis points to 4.90 per cent.

All members also unanimously voted to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

The minutes of the MPC’s meeting will be published on June 22. The next meeting of the MPC is scheduled during August 2-4, 2022.

NNN