RBI hikes rate by 50 bps September 2022

 

RBI hikes rate by 50 bps

Total 190 bps hike since May to tame inflation.

The Reserve Bank of India’s (RBI’S) monetary policy committee (MPC) voted to hike the repo rate by 50 basis points (bps) to 5.9% on Friday in its fourth such move in a row, continuing the fight against inflation and remaining focused on withdrawal of accommodation.

The rate-setting panel kept the inflation forecast for the year unchanged at 6.7%, with the central bank reiterating that inflation will likely cool off to 5% in Q1FY24.

RBI governor Shaktikanta Das did sound a note of caution on inflationary pressures that could emerge in the days ahead, even as crude prices show signs of easing. “Consumer price inflation remains elevated and above the upper tolerance band of the target due to large adverse supply shocks, some firming up of domestic demand and the spillovers from global financial markets,” Das said, adding that the recent correction in global commodity prices, including crude oil, if sustained, may ease cost pressures in the coming months.

The inflation trajectory remains clouded with uncertainties arising from continuing geopolitical tensions and nervous global financial market sentiments,” Das said. Consumer price index (CPI) inflation spiked to 7% in August, well over the MPC’s target band of 4% +/- 2%, after trending down for three straight months.

The panel also cut its gross domestic product (GDP) growth forecast for FY23 to 7% from 7.2%, with Q2 at 6.3%, Q3 at 4.6% and Q4 at 4.6%.

The RBI declined offering any forward guidance on the stance, stating only that inflation will come closer to the target over a two-year period.

Market participants saw the influence of the US Federal Reserve’s aggressive rate actions in Friday’s policy announcement. Rajeev Radhakrishnan, CIO-fixed income, SBI Mutual Fund, said, “The impact of external monetary tightening measures and its spillover effects have been evident in the policy stance and action today. To the extent that these factors prevail over the coming months, the terminal policy rate expectation locally could reset a bit higher.”

Das repeated the RBI’s line that currency market interventions are aimed solely at stemming volatility and the central bank does not target a particular level for the rupee. The future trajectory of monetary policy will be guided by incoming data and the evolving macroeconomic situation, he added.