RBI raises repo rate by 25 bps to 6.5%

The Reserve Bank of India’s monetary policy committee (MPC) on Wednesday decided by a majority of four members out of six to raise its benchmark repo rate by 25 basis points to 6.5 per cent, with immediate effect.

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Since May 2022, the RBI has raised the repo rate, which is the rate at which it lends commercial banks, by 250 basis points.

The lower than earlier rate hike this time around was largely expected given the current environment, where retail inflation is softening even as global growth and geo-political uncertainties remain.

RBI Governor Shaktikanta Das noted that while the global economic outlook doesn’t look as grim as it did a few months ago, and growth prospects in major economies have improved, the situation remains fluid and uncertain.

From the domestic perspective, the Indian economy has so far remained resilient and is estimated to grow around 7 per cent in the current financial year ending March 2023, according to the first advanced estimate of the National Statistical Office (NSO).

India’s CPI (consumer price index) inflation eased to 5.72 per cent in December 2022, a 12-month low.

A strong decline in prices of vegetables has helped inflation come down to within RBI’s tolerance band of 2 per cent to 6 per cent.

However, sticky core inflation (barring food and oil) remains a concern. Looking ahead, Das expects inflation to moderate, but still remain above RBI’s 4 per cent target.

RBI now sees inflation averaging 6.5 per cent in the current 2022-23 financial year and at 5.3 per cent in 2023-24. In the ongoing Jan-March quarter, retail inflation is seen at 5.7 per cent, further moderating to 5 per cent in Apr-June, but then rising slightly to 5.4 per cent in the second and third quarter and 5.6 per cent in the fourth.