The Reserve Bank of India-led rate-setting panel on Wednesday raised the country’s policy rate by a modest 35 basis points in its last policy review of the calendar year, as the fight against inflation is not over yet while the central bank will also have to fuel the country's economic output.
The six-member Monetary Policy Committee (MPC) with five-to-one majority increased the repo rate, or the key rate at which the RBI lends short-term funds to commercial banks, to 6.25% from 5.9%. With this hike, the RBI has broken the 50-basis-point-hike trend that it opted for in each of the last three policy meetings. The key rate has now been raised by 225 (190 + 35) bps since May by the panel. The panel also decided to remain focused on withdrawal of accommodative stance.
RBI Governor and MPC's Chair Shaktikanta Das said while headline inflation may ease through the rest of the year and in the first quarter of the next fiscal year, it is expected to rule above the target. The medium-term inflation outlook is exposed to heightened uncertainties from geopolitical tensions, financial market volatility and the rising incidence of weather-related disruptions.
Growth prospects across the world are dampening. Financial markets remain nervous and are characterised by high volatility and price swings, he said.
"On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects. These actions will strengthen the medium-term growth prospects of the Indian economy," the governor said.
Meanwhile, the more modest RBI rate hike also coincides with indications that the Federal Reserve will shift to smaller rate increases at its policy meeting this month, as the US monetary authority too have to perk up growth while it probably has done a lot with 375 bps of rate hikes to control inflation.
While talking about the rate hikes, RBI deputy governor Michael Patra indicated that the 50bps consecutive hikes are over.
"We have moderated the size of the policy rate increase. It is a fundamental guidance we are giving to the market. If things pan out as we have projected, 50 bps consecutive hikes are over. But we cannot take our shoe off the break because inflation is still averaging 5-5.4% next year. We must guide it to a place where it remains stable at those ranges and then move on to 4%. Till then we must be on our toes," said Patra.
"The RBI policy announcement was broadly in line with our expectations with a 35bps rate hike and no change in stance. That said, the statement was slightly more hawkish than perhaps expected by markets, with no indication that the central bank is coming to the end of its rate hiking cycle for now," said Sakshi Gupta, principal economist at HDFC Bank.
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