RBI MPC Meeting Live Updates: Inflation has peaked and will moderate, says Shaktikanta

This is the third rate hike by the central bank in this financial year. Prior to this, the RBI had raised the repo rate – by 40 bps in an off-cycle meeting in May and 50 bps in June. The market experts expected the MPC to raise the repo rate by at least 35 basis points (bps) in this meeting.

The retail inflation or Consumer Price Index (CPI), which the RBI factors in while considering its benchmark lending rate, stood at 7.01 per cent in June. Retail inflation has continued to remain above the central bank’s comfort level of 6 per cent since January this year.

In his address, Das said that the MPC vote was unanimous and said that the MPC has decided to remain focused on withdrawal of the accommodative stance to check inflation. Additionally, he announced that 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 per cent.

In his speech today, Das said that the Indian economy has been grappling with high inflation and added that India has been facing a $13.3 billion capital outflow in the last few months.

He noted that the financial sector remains well capitalised and India’s forex reserves provide insurance against global spillovers.

Speaking on growth, Das said that 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. However, he cautioned that there are risks from the ongoing Russia-Ukraine war.

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Speaking on inflation, the RBI governor said that retail inflation remains uncomfortably high and noted that inflation expected to remain above 6 per cent. He said that the inflation projection is retained at 6.7 per cent in 2022-23, with Q2 at 7.1 per cent; Q3 at 6.4 per cent; and Q4 at 5.8 per cent, and risks evenly balanced, on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 105 per barrel. The CPI inflation for Q1 of 2023-24 is projected at 5.0 per cent.

In the post-policy press conference, Das said that the Indian economy is an island of stability despite two black swan events and multiple shocks.

Speaking to reporters, the central bank chief said that inflation has peaked and will moderate, but it is at unacceptably high levels. Speaking on the current account deficit (CAD), Das said that CAD will be manageable and the RBI has the ability to manage the gap. Das said that the RBI has the ability to finance the CAD and added that the forex reserves remain strong and we will deal with excess volatility in the exchange rate.

On being asked about the steep rate hikes, he said that a 50 bps hike is the new normal and global central banks have recently raised their respective interest rates by 75-100 bps. He noted that monetary policy will be calibrated, measured and nimble from here on.

How economists and market experts reacted:

• Adhil Shetty, CEO at BankBazaar.com said, “The rise in repo rate coupled with the inflation is going to hit new and existing borrowers hard. A 140 basis points increase in the last few months means borrowers who were paying around 6.8-7 per cent interest will now be paying 8.2-8.4 per cent. This means that even for a 20-year loan, the amount of interest to be repaid is higher than the principal. If the EMI remains constant, the tenor for a 20-year loan can go up by as much as 8 years. As most lenders would not sanction this increase in tenor, it is a given that EMIs would increase. It’s now essential to have a repayment plan as going by the EMIs alone would mean a very high interest outflow.”

• D.R.E Reddy, CEO and Managing Partner at CRCL LLP said, “The RBI today increased the repo rate by another 50 bps to 5.40 per cent with immediate effect. With this move, the stage is set to return to pre-COVID levels with an end of the easy money era. There is absolutely zero probability of India slipping into recession. This will take the terminal rate to 5.90 per cent by the end of FY23. A normal monsoon, good crop year, easing of household inflation and de-escalation of tension between Russia and Ukraine will help keep crude prices in check.”

• Ravi Modani, Founder and CEO at 121 Finance said, “Policy announcement is on the higher end of expected lines, reflecting the RBI’s continued focus to maintain balance between growth and stability. We are right now in a situation where there is a considerable amount of challenge Indian economy faces, specially from global macro monetary policy and political developments. Any decrease in demand due to higher borrowing cost, should be offset by rural demand coming from a very good monsoon. At the same time this might impact the earnings of Q2 for most of the businesses. However, this is a very prudent decision to tread through this phase of global uncertainties with extreme caution and optimism coming from easing of inflation and Rupee maintaining its strength.”

• Motilal Oswal, MD and CEO at Motilal Oswal Financial Services said, “RBI in its latest MPC meeting has hiked the repo rate by 50 bps to 5.4 per cent – levels which was seen before the Covid-19 pandemic. The central bank raised the interest rate for the third consecutive month since May’22 by cumulatively 140 bps in its effort to contain inflation. Despite this sharp hike, RBI expects the inflation to remain above its comfort zone and has retained its CPI inflation forecast at 6.7 per cent for FY23. RBI expects India’s GDP growth to remain strong at 7.2 per cent in FY23. We believe, the commodity prices have cooled off including crude oil, the inflation may be peaking out. We expect RBI may not be very aggressive in its subsequent policy meets and being more data driven based on inflation numbers.”