The Reserve Bank of India's monetary policy committee (MPC) on December 7 hiked the key repo rate by 35 basis points (bps) to 6.25 % in its last meeting of 2022, continuing its fight against inflation.
Repo is the rate at which the central bank lends short-term funds to banks. One basis point is one-hundredth of a percentage point.
The MPC has been on a rate hike course throughout the year, increasing policy rates by nearly two percentage points to fight inflation. Retail inflation has remained above the central bank's comfort level for nearly the entire year.
By law, the MPC is required to keep inflation within the 2-6 percent band. As it failed to meet that mandate, the panel met in November early November to write a letter explaining its failure and the steps it planned to take to cool prices. This is the first time since the MPC was set up in 2016 that such a letter had to be drafted.
High inflation hurts
The MPC decision to hike rates came in the backdrop of stubbornly high inflation, which has remained above the central bank's target for 10 consecutive months.
India's headline retail inflation rate fell to a three-month low of 6.77 percent in October from 7.41 percent in the previous months on a favourable base but still above the central bank's upper tolerance band of 6 percent.
The MPC kept its focus on withdrawal of the accommodative stance. An accommodative stance indicates that the tilt is largely towards a rate cut.
With the latest hike, the repo rate has gone up by 225 bps in the current rate hike cycle.
There have been calls within the MPC for a rate pause. The minutes of the meeting held in September show member Jayanth Varma calling for a pause after nearly two percentage point rate hikes in four months.
Varma argued that too much rate tightening would hamper the nascent economic recovery. “In my view, it is dangerous to push the policy rate well above the neutral rate in an environment where the growth outlook is very fragile,” Varma said.
There are worries on the growth front. India's second quarter GDP more than halved to 6.3 percent from the 13.5 percent reported in April–June period as the base effect faded. India has not yet got back to its desired growth momentum.
On the other hand, unemployment is on the rise. According to CMIE, the unemployment rate in November shot to 8 percent, indicating that the number of jobless people is increasing at a faster pace.
The unemployment rate was at 7.77 percent in October and 6.43 percent in September. High inflation and unemployment are hurting the rural economy, which, in turn, is hurting consumption.
In November, Nielsen IQ’s FMCG Snapshot for Q3 of 2022 showed that rural volumes declined 3.6 percent in the September quarter, a bigger fall than 2.4 percent in the April-June period, marred by inflation and unseasonal rains.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
