RBI MPC hikes key interest rate by 50 bps to 4.9%; retail inflation forecast at 6.7% for FY23

The Reserve Bank of India (RBI)'s monetary policy committee (MPC), which met from 6-8 June, on Wednesday announced another hike in key interest rate by 50 basis points to 4.90 per cent as inflation continues to remain above its comfort level.

RBI Governor Shaktikanta Das had already indicated that there may be another hike in the repo rate though he refrained from quantifying it. 

Further, Das also said that the MPC has unanimously decided to keep the policy stance of ‘withdrawal of accommodation’.

In his press conference, Das highlighted that the war in Europe is lingering and the central bank is facing challenges every day. Countries across the world are facing inflation. The war has led to globalisation and inflation. The process of economic recovery is also getting affected. However, the Indian economy has remained resilient. Recovery has gained momentum despite pandemics and the war. 

Inflation has steeply increased and the MPC noted that the inflation is likely to remain above RBI's comfort band of 6 per cent for the first three quarters of the current financial year 2022-2023.

The Reserve Bank will continue to remain proactive in mitigating challenges, Das mentioned.

The MPC also mentioned that India's real gross domestic product (GDP) forecast is retained at 7.2 per cent for the current financial year, while the CPI-based inflation is projected at 6.7 per cent.

The Standing Deposit Facility (SDF) rate and the Marginal Standing Facility Rate (MSFR) were accordingly adjusted higher by the same quantum to 4.65 per cent and 5.15 per cent, respectively.

Commenting on the MPC's decision, Upasna Bhardwaj Chief Economist at Kotak Mahindra Bank, “The 50-bpsthe  repo rate hike comes on the back of persistence of elevated inflation and the continued upside risks. Given that inflation is expected to remain above 6 per cent through Q3FY23 , RBI has to frontload actions. We continue to see another 60-85bps hike in the rest of FY23 to manage inflationary expectations."

"The RBI remains aggressive with its inflation forecast and has possibly built in the worst scenario on inflation expectations for the moment. We still believe that the front-loading strategy will continue and thus pencil in another 40 to 50 basis points increase in the repo rate in the August policy. Thereafter the RBI may have to be more lenient in the extent of increases, keeping in line with its current inflation trajectory which also points to a sub-6% number in the fourth quarter," said Indranil Pan, Chief Economist, Yes Bank.

Last month, RBI raised the repo rate or short-term lending rate by 40 basis points in an off-cycle monetary policy review to check spiralling inflation.

The Consumer Price Index (CPI) based inflation, which RBI factors in while arriving at its monetary policy, is on the rise since October 2021.

Retail inflation has remained above RBI's upper tolerance level of 6 per cent since January. It had soared to an 8-year high of 7.79 per cent in April. The government has tasked the central bank to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side.

Meanwhile, on Tuesday, the World Bank cut India's economic growth forecast for the current fiscal to 7.5 per cent as rising inflation, supply chain disruptions and geopolitical tensions taper recovery. The GDP growth compares to an 8.7 per cent expansion in the previous 2021-22 fiscal.

Further, India's benchmark 10-year bond yield rose to its highest levelshort-term since March 2019 in early trade on Monday. The benchmark 10-year bond yield was trading at 7.4965%, up 4 basis points from its previous close. Yield rose as high as 7.5004%, its highest since March 22, 2019, according to Reuters.

Last month, MPC raised the key policy rate (repo) by 40 basis points to 4.4 per cent to tame the rising inflation. It was the first-rate hike after August 2018.

With an aim to cushion the impact of lockdown, RBI had slashed the repo rate by 75 basis points to 4.40 per cent in March 27, 2020 from 5.15 per cent.

On May 22, 2020, RBI again cut the repo rate by 40 basis points and brought it down to 4 per cent. Thereafter, it maintained the status-quo in the benchmark interest rate for almost two years before increasing it on May 4, 2022.

Apart from this, in the August review also, it can increase by 0.35 per cent. If this does not happen, then the RBI can make up its mind to increase by 0.50 per cent next week and 0.25 per cent in August, Bank of America Securities said in a research note.