The Reserve Bank of India (RBI) announced its fifth repo rate hike of 2022 by 35 basis points (bps), a jump to 6.25%, in a year marred by unprecedented inflation and global geopolitical risks leading to economic instability. The central bank outlined emerging market economies, especially the ones dependent on food, energy and commodity imports, have been the worst affected this year.
The monetary policy committee decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. It aims to achieve a medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%.
The standing deposit facility (SDF) rate stood adjusted to 6% and the marginal standing facility (MSF) rate and the bank rate to 6.50%.
Top Agenda: Reining In Inflation
While optimistic in an otherwise gloomy world economic environment, the RBI sees inflation as a concern and sees the medium-term inflation outlook exposed to heightened uncertainties from geopolitical tensions, financial market volatility and the rising incidence of weather-related disruptions. With its monetary policy action, the RBI expects to anchor inflation expectations, break core inflation persistence and contain second round effects.
In a press statement, RBI Governor Shaktikanta Das said the RBI will keep Arjuna’s eye on the evolving inflation dynamics and be ready to act as may be necessary, which implies another rate hike is not off the table if inflation persists.
The inflation trajectory going ahead would essentially be shaped by both global and domestic factors—domestic including prices of vegetable prices, cereals, spices, high feed costs and global such as climate events hiking food prices and geopolitical tensions causing uncertainty to food and energy prices—along with correction in industrial input prices and supply chain pressures.
With inflation expected to remain above the upper threshold in Q2 and Q3, the monetary policy committee stressed that sustained high inflation could destabilize inflation expectations and harm growth in the medium-term. The RBI said it continues to weigh the evolving geopolitical developments and the international commodity market dynamics as key determinants of how inflation will look like in the coming quarter.
Growth Outlook
The RBI projects the real GDP growth for 2022-23 at 6.8% and at 7.1% for Q1 2023-24 propelled by good progress of rabi sowing, sustained urban demand, improving rural demand, a pick-up in manufacturing, rebound in services and robust credit expansion.
“Adjusted for inflation, the policy rate still remains accommodative,” the central bank noted and said, “over the next 12 months, inflation is expected to remain higher than the 4% target.” The RBI projects inflation at 6.7 per cent in 2022-23, with Q3 at 6.6% and Q4 at 5.9%. CPI inflation for Q1 2023-24 is projected at 5.0% and for Q2 at 5.4%, on the assumption of a normal monsoon.
Market Reaction
India’s top stock market investors largely expected the RBI to increase the repo rate and both NIFTY 50 and BSE S&P Sensex closed marginally down by 0.44% and by 0.34% respectively on Dec. 7.
Market experts had a mixed reaction with the majority expressing a sense of relief from higher rate hikes cycles while others caution against letting down guard, specifically against inflation-led outcomes.
Indranil Pan, chief economist at Yes Bank, thinks with the pace of increase in the repo rate having been lowered, the risk is for the rate hiking cycle being elongated. Pan expects RBI to remain data-driven and expects two more rate increases of 25 bps each in February and April.
Virat Diwanji, group president and head of consumer banking at Kotak Mahindra Bank, believes there will be plenty of data points before the MPC including the direction of U.S. Federal Reserve rates, December inflation and growth in credit by the next policy action meeting in February. “If the market was wondering whether it was hawkish or dovish, we believe the bank remains hawkish for growth but with stability,” Diwanji said in a press note.
For consumers in general, inflationary pressures will persist, according to the majority of credit lenders who advise maintaining a good credit history, researching the best rate offers and considering refinancing existing loans to lower the monthly payments.
