On Wednesday, RBI took a major decision of increasing the key repo rate by 35 basis points. This will lead to a marginal increase in the EMI of home, auto and other loans. In today’s meeting, RBI slowed down the pace of increase in borrowing cost. Due to this, the rates can reach near the peak. The RBI is once again worried about the fight against inflation which has been troubling for 10 consecutive months. The increase in repo rate is the fifth consecutive increase since May.
The total for the last four increases is 190 bps. A majority of the Monetary Policy Committee (MPC) voted to increase the repo rate to 6.25 per cent. The committee had three members from RBI and three external members. According to the statement of RBI Governor Shaktikanta Das, four members of the committee voted in favor of withdrawing the accommodation.
“Economic growth in India remains resilient and inflation is expected to ease,” Das said. “But the fight against inflation is not over.” The RBI retained its inflation forecast of 6.7 per cent for the current fiscal year ending March, but cut economic growth expectation to 6.8 per cent from the earlier forecast of 7 per cent. Retail inflation, which remained above the 2-6 per cent target zone for 10 consecutive months, eased to a three-month low of 6.77 per cent in October, helped by a slower rise in food prices and a higher base effect.
Das said that inflation is coming down. “The worst of inflation is behind us,” he said, adding that there was no room for complacency. The central bank, whose primary mandate is to ensure price stability, wrote a letter to the government last month detailing how global factors contributed to its failure to keep inflation below the target zone for three consecutive quarters. . On the same note, it outlined a roadmap to bring the price advantage within the target.
Announcing the decisions of the Monetary Policy Committee, Das said that the main risk is that inflation may remain stable and elevated. “The MPC was of the view that a more calibrated monetary policy action was needed to stabilize inflation expectations, break core-inflation persistence and reduce the second round effect,” he said. Acute Ratings & Research said the RBI’s stance remains moderately accommodative, and a rate hike is likely in February next year, with a possible terminal rate of 6.5 per cent by early FY2024.
It has been noted that higher pass-through rates for home loans may start affecting housing demand, especially in the mid to high-ticket segment. Das said the Indian economy remains resilient, drawing strength from its macroeconomic fundamentals. Good progress in rabi sowing, sustained urban demand, revival in rural demand, pick-up in manufacturing, improvement in services and strong credit expansion have supported the outlook for the economy.
“India is widely seen as a bright spot in an otherwise gloomy world,” he said. “Nevertheless, our inflation remains high in most parts of the world. Global spillovers continue to provide high volatility and uncertainty.” India reported a GDP growth of 6.3 per cent in the July-September quarter, slightly better than expected but less than half of the 13.5 per cent growth in the previous three months. Das said, “The focus continues to fight inflation. No shortage will be allowed in this.
Food inflation is likely to ease with a moderate softening of winter and the prospect of a bumper rabi crop, but pressure points remain in the form of prices of cereals, milk and spices in the near term, he said. Assuming an average crude oil price of US$100 per barrel, headline inflation is projected at 6.7 per cent in 2022-23, 6.6 per cent in Q3 and 5.9 per cent in Q4. The current account deficit (CAD) is manageable, he said, adding the rupee’s move has been the least disruptive relative to its peers.
(With inputs from PTI)