RBI Governor, Shaktikanta Das
The Reserve Bank of India’s monetary policy committee hiked the key repo rate by 35 basis points (bps) as expected on December 6, saying the battle against inflation would continue even as it lowered the FY23 GDP forecast to 6.8 percent from 7 percent.
The hike in the key benchmark lending rate was lower than the 50 bps increase the central bank thrice went for since June and an off-cycle 40 bps increase in May.
Sharing the MPC decisions, RBI governor Shaktikanta Das acknowledged “mixed signals” were emanating from geopolitical situations, financial markets, and “profound shocks and unprecedented uncertainty in global economy”.
Inflation “remains high and broad based” world over, Das said, adding fragmentation in trade, finance and technology was adding to de-globalisation.
The Indian economy remained resilient, drawing strength from its macroeconomic fundamentals, the central banker said.
“While being watchful of the impact of our earlier monetary policy actions, we will keep Arjuna’s eye on the evolving inflation dynamics and be ready to act as may be necessary. Our actions will be nimble and in the best interest of the economy. The aspect of growth will obviously be kept in mind,” Das said as he concluded his address.
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Here are the highlights of the RBI governor’s speech:
— Repo rate increased by 35 bps to 6.25%
The MPC voted 5-1 to increase the repo rate by 35 basis points to 6.25 percent.
Deputy governors Shashanka Bhide, Ashima Goyal, Rajiv Ranjan, Michael Debabrata Patra and Governor Das voted to for a 35 bps increase, while deputy governor Jayanth R Varma voted against the hike.
The Standing Deposit Facility rate and Marginal Standing Facility (MSF) rate were also increased by 35 bps each to 6 percent and 6.5 percent, respectively.
— Stance focused on ‘withdrawal of accommodation’
Das said the MPC voted 4-2 to remain focused on withdrawal of accommodation so that inflation remains within the target while supporting growth.
On balance, MPC was of the view that further calibrated action was warranted to keep inflation expectations anchored, break core inflation persistence and contain second-round effects.
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Das, Bhide, Ranjan and Patra voted to remain focused on the withdrawal of accommodation. Goyal and Varma voted against this part of the resolution.
Adjusted for inflation, policy rate remains accommodative. Inflation is expected to be above 4 percent in the next 12 months.
— Economic activity continues to gain strength
Economic activity continued to gain strength in October. Tractor and two-wheeler sales suggest rural demand is recovering, Das said. Drag from net external demand was further accentuated in October but the agriculture sector remained resilient, he said.
“Manufacturing, services PMI for India in November among the highest in the world. Going ahead, investment activity will get support from government capex. RBI surveys show consumer confidence has further improved. Manufacturing and infrastructure firms are optimistic about the outlook,” the RBI governor added.
— GDP growth forecast for FY23 lowered to 6.8%
The MPC lowered the GDP growth forecast for FY23 to 6.8 percent from 7 percent. The GDP growth forecast for October-December 2022 was lowered to 4.4 percent from 4.6 percent. For January-March 2023, it was reduced to 4.2 percent from 4.6 percent, for April-June 2023 it was lowered to 7.1 percent from 7.2 percent and for July-September 2023, it is projected at 5.9 percent.
— CPI inflation forecast retained at 6.7%
CPI inflation forecast for FY23 has been retained at 6.7 percent. CPI inflation forecast for October-December 2022 was raised to 6.6 percent from 6.5 percent and for January-March 2023 to 5.9 percent from 5.8 percent.
Das said the battle against inflation was not over. The CPI inflation forecast for April-June 2023 has been retained at 5 percent, while for July-September it is seen at 5.4 percent.
— Liquidity conditions likely to improve
Das was optimistic that the liquidity conditions would likely improve. “We will look for durable signs for turn in liquidity cycle for infusing liquidity. The RBI remains nimble and flexible in its liquidity management operations,” he said.
The governor said though the RBI was in an absorption mode, it was ready to conduct LAF operations that inject liquidity as may be needed. “We will look for a durable sign of a turn in the liquidity cycle. Market participants must wean themselves away from overhang of liquidity surpluses,” he added.
— Impact on the rupee
Das said the Indian rupee appreciated 3.2 percent during April-October in real terms, even as major currencies depreciated. “The rupee should be allowed to find its level,” he added.
— On forex and exports
Das said slowing external demand was weighing on India’s merchandise exports but the size of forex reserves “is comfortable and has increased”.
“Forex reserves stand at $ 561.2 billion as on December 2. Meanwhile, FDI inflows rose to $ 22.7 billion in April to October 2022 from $ 21.3 billion in the corresponding period last year,” he added.
Key Takeaways of the RBI MPC announcement on December 7
The governor also announced that:
— The RBI will restore normal market hours of 9am-5pm for Call, CP, CD market
— The dispensation of enhanced HTM limit for banks extended up to March 2024
— Banks’ HTM limits will be restored to 19.5 percent from 23 percent in a phased manner starting April-June 2024