India's central bank increases policy repo rate by 50 bps

“Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.65 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 5.15 per cent,” the RBI said in its latest Monetary Policy Statement, 2022-23, based on the Resolution of the MPC which held its meeting on June 6-8, 2022.

The MPC 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,” RBI said.

Taking into account several factors, including the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, RBI said 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 central bank retained real GDP growth projection for 2022-23 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.

“Inflation risks flagged in the April and May resolutions of the MPC have 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,” the MPC resolution said.

While 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 noted 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.”

The next meeting of the MPC is scheduled during August 2-4, 2022.

ALCHEMPro News Desk (RKS)