RBI hikes repo rate to 6.5%, says core inflation a worry
2 min read . Updated: 09 Feb 2023, 12:17 AM IST
PremiumThe Reserve Bank of India slowed the pace of interest rate hikes to a quarter-percentage point as inflation moderated, while keeping the option of rate hikes open amid stubborn core inflation
MUMBAI : The Reserve Bank of India slowed the pace of interest rate hikes to a quarter-percentage point as inflation moderated, while keeping the option of rate hikes open amid stubborn core inflation.
With the latest hike, RBI’s monetary policy committee (MPC) raised the repo rate to 6.5%, the highest since 2018, as it attempts to cool inflation closer to its target. The committee kept the policy stance of “withdrawal of accommodation" unchanged. The decision was not unanimous, with four out of the six members of the MPC voting in favour of the rate hike. Ashima Goyal and Jayanth Varma voted against an increase.
Governor Shaktikanta Das on Wednesday said inflation is likely to remain above 4%, the mid-point of the central bank’s 2-6% target range, in the next fiscal with risks from geopolitical tensions, global financial market volatility, rising non-oil commodity prices and volatile crude prices.
“The rate hikes since May 2022 are still working their way through the system. On balance, MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen medium-term growth prospects," Das said, adding that the stickiness of core or underlying inflation is a matter of concern.
With inflation seen at 5.6% in the fourth quarter of the next fiscal, adjusted for inflation, the policy rate still trails pre-pandemic levels, Das added.
While retail inflation has dropped below RBI’s 6% upper target, core inflation, which excludes volatile components of the index such as food and fuel, has remained stubbornly high for over a year.
With the monetary policy stance remaining unchanged, ICRA chief economist Aditi Nayar expects the monetary policy panel to reserve the possibility of further rate hikes if inflation exceeds its projections. “We expect the monetary policy committee to remain vigilant and data-dependent in FY24," she said.
Assuming an average price of $95 per barrel for crude oil, the MPC expects CPI inflation to average 5.3% next financial year.
“We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bringing down inflation. Thus, monetary policy has to be tailored to ensuring a durable disinflation process," Das said.
India’s economic activity is seen holding up well despite the interest rate increases. For the year starting 1 April, the monetary panel projected real GDP to grow at 6.4%. It expects first-quarter GDP growth at 7.8% and second-quarter at 6.2%. GDP growth in the third quarter is seen at 6%, and 5.8% in the fourth quarter.
“RBI is likely to become more data-dependent, and this does not rule out another rate hike in the upcoming policy. Even as headline inflation is likely to moderate in the coming months, core inflation could remain sticky—and if RBI chooses to continue seeing signs of durable moderation in core inflation as a yardstick for policy tightening, another 25bps rate increase in April could be likely. We think that a change in stance to neutral is unlikely until the RBI pauses its rate hike cycle," HDFC Bank said in a research note.
