NEW DELHI: The Reserve Bank of India (RBI) on Friday raised benchmark lending rates for the 4th straight time in a row, in a bid to tame the soaring inflation.
The monetary policy committee (MPC), comprising of three members from the RBI and three external members, raised the key lending rate or the repo rate by 50 basis points (bps) to 5.90% with five out of the six voting in favour of the hike.
The RBI has now raised rates by a total 190 basis points since its first unscheduled mid-meeting hike in May but inflation continues to remain stubbornly high – a phenomenon that is affecting much of the global economy.
The standing deposit facility rate and the marginal standing facility rate were also increased by the same quantum to 5.65% and 6.15%, respectively.
Quick Edit: RBI’s monetary policy committee showed the first signs of differences in the scale of interest rate hikes
The rate hike was inevitable given the elevated levels of inflation in the country and a sharply sliding rupee. The rupee depreciation has hastened following the US Fed raising their interest rate thrice by 75 basis point each in the recent past. Other major central banks too have become aggressive in raising rates.
Since RBI’s last policy meet in August, retail inflation has risen above 7% again and the rupee has weakened 9.5% on year, with pressure on the currency accelerating after the US Federal Reserve’s meeting last week.
Here are the key takeaways from the RBI governor’s statement:
* GDP projection lowered
The central bank has slashed growth projection to 7% for the current fiscal from the earlier forecast of 7.2%, citing aggressive tightening of monetary policies globally and moderation in demand.
Real GDP growth in the first quarter of the current fiscal was 13.5%.
Even though the RBI lowered annual GDP projection from 7.2% to 7% for FY23, it raised quarterly GDP estimates marginally. For Q2 of FY23, GDP is projected at 6.3%, for Q3 it is 4.6% and 7.2% for Q1 of FY24.
Das, however, cautioned that there is a third wave of shock globally triggered by aggressive monetary policy tightening to curb inflation.
The central bank in April slashed the real GDP growth projection to 7.2 per cent from its earlier forecast of 7.8 per cent for 2022-23.
* Inflation forecast retained
RBI retained its inflation projection for current fiscal year at 6.7% amid global geopolitical developments triggered by Russia-Ukraine war. For September quarter of 2022-23, RBI projected retail inflation at 7.1%.
For third quarter, inflation is estimated at 6.5% and further down to 5.8% in March quarter with risks evenly balanced, the governor said. For first quarter of next fiscal year, retail inflation is forecast at 5%.
RBI governor Shaktikanta Das said the impact of inflation globally is weighing heavily on the domestic market.
“The inflation trajectory remains clouded with uncertainties arising from continuing geopolitical tensions and nervous global financial market sentiments,” Das said in his address accompanying the MPC’s decision.
“In this backdrop, MPC was of the view that persistence of high inflation, necessitates further calibrated withdrawal of monetary accommodation to restrain broadening of price pressures, anchor inflation expectations and contain the second round effects. This action will support the medium-term growth prospects of our economy,” he added.
* RBI to continue with 14-day auctions
The Reserve Bank of India will stop conducting 28-day variable rate reverse repo (VRRR) auctions, considering the current banking system liquidity conditions, but will continue with 14-day VRRR auctions.
“In view of the moderation in surplus liquidity, it has now been decided to merge 28-day VRRR with the 14-day VRRR. Consequently, from now, only 14-day VRRR auction will be conducted,” RBI governor said.
“Fine-tuning operations of various maturities will be conducted for injection as well as absorption of liquidity as may be necessary from time to time,” he added.
The RBI has been conducting 28-day VRRR auctions for Rs 50,000 crore since November 2021, but these auction have not been fully subscribed for the last few months.
The RBI also conducts 14-day VRRR auctions for Rs 2 lakh crore and these too have failed to attract complete subscription in last few weeks.
* Offline payment aggregators to be at par with online peers
Offline payment aggregators (PAs) who aid in face-to-face transactions at merchant outlets will now come under the regulatory purview of RBI, governor Shaktikanta Das announced.
“Keeping in view the similar nature of activities undertaken by online and offline PAs, it is proposed to apply the current regulations to offline PAs as well,” Das said after announcing the bi-monthly policy review.
Das said there will be “convergence on standards of data collection and storage” after the move, meaning that such companies will not be able to store details like those of credit and debit cards of a customer.
* 67% of decline in forex reserves due to valuation changes
Shaktikanta Das said 67% of the decline in the foreign exchange reserves since April was due to valuation changes arising from strengthening US dollar and higher American bond yields.
The forex reserves, which stood at $606.475 billion as on April 2, have declined to $537.5 billion as on September 23. It was also the eighth straight week when the reserves declined.
The movement of the Indian rupee has, however, been orderly compared to most other countries, Das said while unveiling the latest bi-monthly monetary policy review.
The rupee has depreciated 7.4% against the US dollar during the same period – faring much better than several reserve currencies as well as many of its EME and Asian peers, he added.
(With inputs from agencies)
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