A hat-trick of hikes after, RBI cautious of inflation and external risks

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) raised the policy rates by 50 basis points (bps) in today’s meeting, bringing the repo rate to 5.40%, 25 bps above the pre-pandemic level of 5.15% in February 2020. This was the second consecutive hike of 50 bps, and the third hike of this fiscal. The tightening was triggered by high inflation, synchronised monetary policy tightening globally, and volatile global financial conditions.

The frontloading of the repo rate hike was needed as inflation, despite some softening, is still way above the upper tolerance limit. It also partly addresses the spillover risks from sharper rate hikes by the US Federal Reserve (Fed) and other major central banks. In this backdrop, we expect the RBI to raise the rate by another 25 bps in its September monetary policy meeting. The future pace of hikes will depend on incoming data.

Highlights of the August MPC meeting

• The MPC voted unanimously to raise policy rates by 50 bps, taking the repo rate to 5.40%, the standing deposit facility (SDF) to 5.15%, and marginal standing facility (MSF) to 5.65%
• The monetary policy stance was maintained at ‘withdrawal of accommodation’ with a 5-1 majority
• The MPC retained forecast for Consumer Price Index-based (CPI) inflation to 6.7% for fiscal 2023, as in the previous policy meeting, with risks evenly balanced
• Projection for gross domestic product (GDP) growth was retained at 7.2% for this fiscal, with risks broadly balanced