RBI raises repo rates by another 25 bps to 6.5%

The Reserve Bank of India on Wednesday raised the repo rates by another 25 basis points to 6.5%. Its Monetary Policy Committee (MPC) met Feb 6-8. Four of its six members voted for the hike.

The MPC also decided by a majority of four out of six members to remain focused on the withdrawal of accommodation to ensure inflation remains within the target while supporting growth.

The RBI has now increased rates by a total of 2.5 percentage points since May 2022. The latest 25-bps rate hike is a slower increase as compared to the 35-bps rate hike done in December 2022 or the 50-bps rate hike done in September 2022.

"The global economic outlook does not look as grim now as it did a few months ago...As price pressures wane, several central banks have opted for slower rate hikes or pauses...A rate hike of 25 basis points is considered as appropriate at the current juncture. The reduction in the size of the rate hike provides the opportunity to evaluate the effects of the actions taken so far on the inflation outlook and on the economy at large," RBI Governor Shaktikanta Das said in his speech.

Consumer price inflation in India moved below the upper tolerance level during November-December 2022, driven by a strong decline in the prices of vegetables, however, core inflation which excludes food and fuel prices, however, still remains sticky, the Governor noted. Inflation is projected at 6.5% in 2022-23.

FY24 GDP growth seen at 6.4%

The RBI has forecast real GDP growth at 6.4% for 2023-24 as compared to the 7% print seen for the current financial year 2022-23 according to the first advance estimate of the National Statistical Office (NSO). Q1 GDP growth is forecast at 7.8%, Q2 at 6.2%, Q3 at 6% and Q4 at 5.8%.

Inflation is projected at 5.3% for 2023-24, with Q1 print seen at 5%, Q2 at 5.4%, Q3 at 5.4%, and Q4 at 5.6%. As per the regulation, the RBI is required to keep inflation at 4% with a 2% leeway provided on either side.

The food inflation outlook will benefit from a likely bumper rabi harvest led by wheat and oilseeds, Governor Das said. The food inflation bucket constitutes about 50% of the overall retail inflation.

"The commitment to fiscal consolidation that has been carried forward in the Union Budget 2023-24 and the future trajectory of reducing the gross fiscal deficit will engender an environment of macroeconomic stability. This augurs well for the inflation outlook," Das said.

Fiscal deficit, which is simply the difference between the government's total revenue and total spending in a financial year, for 2022-23, is seen adhered to the budgeted estimate of 6.4%, while for the next fiscal 2023-24, the aim is pegged lower at 5.9%.