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The RBI’s Monetary Policy Committee met market expectations by increasing the repo rate by 25 basis points, although it left some prayers unanswered. The fond hope was that the MPC would take its cue from global central banks and announce a pause on rate increases. The consolation is that two of the six MPC members didn’t want to raise rates.
Nevertheless, the central bank's commentary has a hawkish undertone and suggests that more interest rate hikes cannot be ruled out.
This is against what some global central banks have said. The Bank of Canada became the first central bank in a G10 economy to hint it was ready to pause its tightening cycle. The Federal Reserve while increasing interest rates by 25 basis points was dovish in its outlook and the Bank of England hinted that its hike of 50 basis points might be the last interest rate hike for some time.
The MPC, while increasing the policy rate, said that its stance continued to be ‘withdrawal of accommodation’, since liquidity remained abundant. The RBI governor said overall monetary policy conditions remain accommodative and the central bank will continue with its calibrated monetary policy.
There had been some expectations that the stance would be moved to ‘neutral’, and the continuation of the ‘withdrawal of accommodation’ stance was a disappointment for the bond market.
The RBI governor said domestic growth continues to remain robust with capacity utilisation in manufacturing being above its long-period average and high-frequency indicators like port freight traffic, e-way bills, and toll collections being buoyant. Domestic demand is sustained by strong discretionary spending, with rural demand showing improvement and investment activity gradually gaining ground.
The inflation outlook is mixed with better prospects for the rabi crop though global commodities prices are subject to uncertainties and supply disruptions. The RBI has projected that inflation in Q4 will be 5.7 percent and if the monsoon is normal, then CPI inflation is projected at 5.3 percent for 2023-24. Inflation is expected to be well within the central bank’s upper target limit of 6 percent in the next fiscal year.
On growth, the RBI pegged GDP growth at 6.4 percent in FY24, close to the budgeted level expectations.
In short, the majority of the MPC members are still wary of inflation, probably because it is still near the upper tolerance mark of 6 percent and core inflation continues to be elevated, with global uncertainties adding to the uncertainty.
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