Committee retains FY23 CPI forecast at 6.7%, flags uncertainty on inflation trajectory
Mumbai, NFAPost: The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday announced a 50 basis point hike in the repo rate to 5.40 per cent, citing continued upside risks to inflation.
The Standing Deposit Facility (SDF) rate is now at 5.15 per cent, while the Marginal Standing Facility (MSF) Rate stands at 5.65 per cent. The SDF represents the lower band of the interest rate corridor and the MSF the higher.
A ‘Business Standard’ poll on Monday predicted a 35-50 basis-point increase in the repo rate at this week’s policy statement. The benchmark policy repo rate is now at the highest since August 2019.
As in its June policy statement, the MPC said this morning the rate-setting panel was focused on the withdrawal of accommodation. Given that the MPC is on a policy-tightening path, some economists had called for a shift in stance to neutral or calibrated tightening.
The latest rate action takes the total tally of rate hikes since May to 140 basis points. Accounting for the introduction of the SDF at a higher rate than the reverse repo rate in April, effective rate hikes stand at 180 bps so far in 2022.
“Spillovers from geopolitical shocks are imparting considerable uncertainty to the inflation trajectory. More recently, food and metal prices have come off their peaks,” said the MPC’s statement.
“International crude oil prices have eased in recent weeks but remain elevated and volatile on supply concerns even as the global demand outlook is weakening. The appreciation of the US dollar can feed into imported inflation pressures.”
Consumer Price Index (CPI) inflation has remained above the upper band of the RBI’s mandated 2-6 per cent range for six straight months up to June 2022.
The June inflation print was at 7.01 per cent. The RBI’s medium-term target for CPI inflation is 4 per cent.
Upside risks to domestic inflation increased significantly after Russia’s invasion of Ukraine in late February led to a sharp rise in global commodity prices.
The RBI retained its CPI inflation forecast of 6.7 per cent for the current financial year, with risks evenly balanced. The CPI forecast assumes the average price of crude oil for the Indian basket at $105 per barrel.
CPI inflation is seen at 7.1 per cent in July-September, 6.4 per cent in October-December and 5.8 per cent in January-March. The price gauge is seen at 5 per cent in the first quarter of 2023-24.
The RBI’s forecast point to the likelihood of the MPC failing to meet the mandate of ensuring that average inflation does not sustain above the target band for more than three successive quarters. In the event of failure, the RBI must provide an explanation to the government.
The MPC on Friday retained the real GDP growth forecast of 7.2 per cent for the current financial year. GDP growth for the first quarter of the next financial year is seen at 6.7 per cent.
Bond prices fell sharply after the policy statement with the yield on the 10-year benchmark bond climbing 10 basis points to 7.26 per cent. The bond market had hoped for a rate hike of 35 bps along with signals that the RBI may temper future rate hikes.
The rupee appreciated sharply versus the US dollar and was last at 79.07 per dollar compared to 79.47 per dollar at the previous close on Thursday.
