RBI hikes repo rate by 35 bps to 6.25%, lowers FY23 GDP growth forecast to 6.8%

The Reserve Bank of India (RBI) on Wednesday raised its key repo rate, or the key lending rate, by a smaller 35 basis points to 6.25%, to curb lingering inflation pressures. This is RBI's fifth straight increase in key lending rate. 

"Our financial system remains robust and stable, and corporates are healthier than before. India is widely seen as a bright spot in an otherwise gloomy world," said RBI Governor Shaktikanta Das in his policy statement.

RBI has lowered its gross domestic product  (GDP) growth forecast for FY23 to 6.8% from 7% earlier, Das announced.  The Monetary Policy Committee (MPC) maintained its stance on "withdrawal of accommodation", with four out of six members voting in favour as the committee continues to focus on pulling out high levels of cash from the banking system without stunting growth. Five of the six MPC members voted in favour of the rate hike increase.

CPI inflation forecast for October-December 2022 has been raised to 6.6% from 6.5%. CPI inflation forecast for January-March 2023 has been raised to 5.9% from 5.8%. CPI inflation forecast for April-June 2023 retained at 5%. CPI inflation is seen at 5.4% in July-September 2023, said RBI Governor.

The standing deposit facility rate and the marginal standing facility rate were also increased by the same quantum to 6% and 6.5%, respectively.

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RBI Governor said in his statement that core inflation is exhibiting stickiness and further calibrated monetary policy action is needed. He also said that liquidity in the banking system remains in surplus.

"The MPC was of the view that further calibrated monetary policy action was warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects,” Das said as he announced the monetary policy committee's decision.

Retail inflation slowed to 6.77% in October having stayed above the upper end of the RBI's 2-6% tolerance band all year, down from 7.41% in September and 7% in August.

The smaller rate hike by RBI's MPC coincides with expectations that the US Federal Reserve will shift to smaller rate rises at its policy meeting later this month. 

Inflation is expected to remain above the 4% midpoint of the RBI's target for the next 12 months, said Das.

The RBI also has to consider the potential pressure on the rupee if it falls behind expected increases in US rates.

India's gross domestic product (GDP) growth for July-September was reported at 6.3%, matching the RBI's own forecasts.

Adhil Shetty, CEO, Bankbazaar.com, said: "RBI’s decision to increase the repo rate by 35 BPS to 6.25% is along the expected lines. The decision has been taken to tame inflation, which remains above 4%. It’s the fifth hike this year, which tells you how stubborn the inflationary trends have been. But the view is that inflation, while remaining high, is moderating, and the rates are somewhere close to their peak."

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