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The Monetary Policy Committee (MPC), in its December meeting, hiked the repo rate by 35 basis points, as against 40-50 basis point increases made since May. Mint explores the central bank’s softening approach, and what it could do next.

Is RBI charting a softer approach?

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After the MPC meeting held during 5-7 December, the Reserve Bank of India (RBI) raised the repo rate by 35 basis points to 6.25% from 5.9%. There has been a 225 basis points increase (including the latest hike) in the repo rate since May 2022. In earlier meetings, held between May 2022 and October 2022, the MPC had increased the repo rate in a range of 40 to 50 basis points consistently. However, the recent hike suggests that the central bank is charting a softer approach. The standing deposit facility rate and the marginal standing facility rate were also increased to 6.0% and 6.5% respectively.

What factors influenced the MPC?

Signals from the US Fed in the last week of November have pointed towards the possibility of subsequent Fed rate hikes being smaller. Foreign portfolio investors, in November, have clocked net inflows of $4,138 million, the second highest since January, indicating that foreign money is returning. Also, with retail and wholesale inflation indices being at 6.77% and 8.39% respectively in October, there are indications of a softening trend in inflation. Moreover, there is considerable apprehension that the restrictive approach could worsen the anticipated slowdown in India’s economic growth rate.

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Easing pain

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Has the RBI been effective in containing inflation?

No doubt, retail inflation has softened from a peak of 7.79% in April 2022 to 6.77% in October. This is mainly due to prices of commodities such as crude oil coming down from a high of $127.98 on 8 March to $79.18 on 6 December. Also, effective supply chain management and fiscal steps taken by the govt have been instrumental in curbing inflationary pressures.

Have the rate hikes impacted consumers?

Interestingly, disbursal of non-food credit, including personal loans, clearly suggests that policy rate hikes have failed to deter investors as well as consumers. Also, keeping in view the emerging economic situation in the next few years, especially the slowdown in India’s major export markets such as the US and China, there is consequent need for the country to rely more on its domestic market. Pressure on trade deficit as well as rate of exchange may rise which could lead to a slowdown in the country.

What should be RBI’s next course of action?

Inflation targeting, though a key target, is not central bank’s sole objective. Global headwinds have adversely impacted all major emerging economies and India has not been spared either. Thus, along with inflation targeting, the RBI also needs to keep an eye on economic growth as well as external geopolitical developments. Including economists from diverse areas can add value to the central bank’s decision-making process.

(Contributed by Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH)

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