The Reserve Bank of India (RBI) decided to hike repo rates by 40 basis points in an off-cycle monetary policy committee (MPC) meeting, Governor Shaktikanta Das said on Wednesday. He also stated that the MPC expects inflation to rule at elevated levels.
Governor Das during the MPC meeting announcement said that “while economic activity is navigating the vortex of forces confronting the world with resilience on the strength of underlying fundamentals and buffers, the risks to the near-term inflation outlook are rapidly materialising, as reflected in the inflation print for March and the developments thereafter.”
He said that MPC expects inflation to rule at elevated levels and warrant calibrated steps to anchor inflation expectations and contain effects. Das said that on the basis of this, the policy repo rate was increased by 40 bps to 4.40 per cent. The MPC decided to maintain accommodative stance but with a focus on withdrawal of accommodation to ensure that inflation remains within target.
The Governor said that inflation trajectory is dependent on the evolving geopolitical situation. Global commodity prices are driving the food prices trend in India. Inflation sensitive items are impacted by global shortages due to output losses and export restrictions.
He added that core inflation is likely to remain elevated in the coming months. “Renewed lockdowns and supply chain disruptions due to resurgence of COVID-19 infections in major economies could sustain higher logistics costs for longer,” he added.
However, the forecast of a normal southwest monsoon has brightened the prospects of kharif production, he added. Contact-intensive services are expected to continue their recovery as third wave ebbs and vaccination coverage grows. Governor Das said that investment activity should also get an uplift from robust government capex, and stronger corporate balance sheets.
“On the other hand, the worsening external environment, elevated commodity prices and persistent supply bottlenecks pose formidable headwinds, along with volatility spillovers from monetary policy normalisation in advanced economies. On balance, the Indian economy appears capable of weathering the deterioration in geopolitical conditions but it is prudent to continuously monitor the balance of risks,” he said.
The Governor further stated that since the MPC meeting in April, disruptions, shortages and escalating prices due to geopolitical tensions have continued, increasing the downside risks.
“All members of the MPC – Dr Shashanka Bhide, Dr Ashima Goyal, Prof Jayanth R Varma, Dr Rajiv Ranjan, Dr Michael Debabrata Patra and Shaktikanta Das – unanimously voted to increase the policy repo rate by 40 basis points to 4.4 per cent,” the statement added.
The next meeting of the MPC is scheduled from June 6-8.
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