- The Reserve Bank of India (RBI) hiked the repo rate by 50 basis points, concentrating on removing accommodative policies in order to keep inflation within the target range
- Inflation is now expected to be 6.7% in 2022-23
- RBI is focussing on price stability for ensuring lasting growth and prosperity”
- Governor also announced various measures related to Cooperative banks, Linking of RuPay Credit Cards to the UPI platform, etc for promoting inclusive growth.
At the conclusion of the monetary policy committee meeting on June 8, the Reserve Bank of India (RBI) hiked the repo rate by 50 basis points, the second time in five weeks. The Monetary Policy Committee (MPC) resolved at its meeting to raise the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 4.90 percent with immediate effect, based on an assessment of the existing and emerging macroeconomic circumstances.
The MPC is concentrating on removing accommodation in order to keep inflation within the target range while promoting growth. The global economy has faced obstacles in the form of multi-decadal high inflation, slowing growth, an unstable geopolitical climate, economic sanctions stemming from war, higher oil and commodity prices, supply chain disruptions, and so on since the last MPC meeting in May 2022. An unstable geopolitical environment and higher commodity prices have the potential to fuel higher inflation in the Indian Economy.
Wheat export restrictions may help to boost local supplies, but a shortage in rabi yield owing to the heat wave may create a risk for supplies. Edible oil prices are still under pressure due to tight global supply, however, there has been some relief with the easing of the export ban. Though domestic fuel prices related to petroleum products have moderated due to easing in excises duties, prices of international crude oil remain high which may have an impact on domestic energy prices by cost pass through. Further, in a poll conducted by RBI, the risk of an increase in electricity price cannot be ruled out, which may impact both input and output prices. This may further increase inflation.
RBI evaluated all risks before raising the repo rate, including the assumption of a regular monsoon in 2022. The average crude oil price (Indian basket) of US$ 105 per barrel was also taken into account by the RBI. Inflation is now expected to be 6.7% in 2022-23, based on these estimates. With risks balanced, inflation is expected to be 7.5 percent in Q1, 7.4 percent in Q2, 6.2 percent in Q3, and 5.8 percent in Q4.
According to RBI Governor Mr Shaktikanta Das the ongoing war in Europe, as well as the sanctions that have accompanied it, have kept global commodity prices high. In many economies, this is putting prolonged upward pressure on consumer price inflation, pushing it well above the target. The continuing conflict is stifling global trade and prosperity. The faster rate at which systemic advanced economies (AEs) are normalizing their monetary policies is increasing global financial market volatility.
According to Governor, this is evident in huge equities market corrections, significant changes in sovereign bond yields, US currency appreciation, and capital outflows from emerging market economies (EMEs) and even certain advanced economies (AEs). The EMEs are also seeing their currencies depreciate. Concerns about stagflation are spreading over the world, causing global financial markets to become more volatile. This is pouring back into the real economy, clouding the picture even more.
“Experience teaches us that preserving price stability is the best guarantee to ensure lasting growth and prosperity”
Mr. Das said that The Reserve Bank will ensure that sufficient liquidity is available to meet the economy’s productive needs. The Reserve Bank will also remain focused on the government’s borrowing program being completed in a timely manner.
Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das, all members of the MPC, voted unanimously to raise the policy repo rate to 4.90 percent.
Governor also announced various measures related to Cooperative banks, Margin Requirements for Non-Centrally Cleared Derivatives (NCCDs), Margin Requirements for Non-Centrally Cleared Derivatives (NCCDs), Linking of RuPay Credit Cards to the UPI platform, and the Review of the Payments Infrastructure Development Fund Scheme for promoting inclusive growth.
Staff Galactik Views