Why RBI Policy | Reserve Bank of India | Shaktikanta Das

The Reserve Bank of India announced a 35-basis-point increase in the repo rate to 6.25 per cent. The RBI Monetary Policy Committee (MPC) voted to raise the rate to bring elevated inflation back towards its target of 4 per cent, governor sashikanth Dash said The six-member MPC, which held its bi-monthly policy meeting from December 5 to 7, remained focused on withdrawing accommodation. The MPC’s rate action was not unanimous, with 5 out of 6 members voting for the rate hike. The decision on the stance was also not unanimous, with 4 out of six members voting for the retention of the stance. The Standing Deposit Facility rate – which represents the floor of the interest rate corridor, is now 35 bps higher at 6 per cent. The Marginal Standing Facility rate, which is the upper band of the interest rate corridor, has also been increased by 35 bps to 6.50 per cent. The rate hike was in line with market expectations – A Business Standard poll of 10 respondents had predicted a rate hike of 35 basis points. At its current level, the repo rate is at its highest since February 2019. So far, in 2022, the MPC has raised the repo rate by 225 basis points. The yield on the 10-year benchmark bond was last at 7.29 per cent. Four basis points higher of the previous close. Bond prices and yields move inversely. Traders said that the initial weakness in bonds was owing to the repeated concern expressed by Dash about persistent and sticky core inflation. The rupee was last at 82.62 per US dollar, flat versus the previous close. Dash said that the MPC had retained its inflation forecast for the current financial year at 6.7 per cent. The MPC has, however, made mild upward revisions to the inflation forecasts for the current quarter and the next quarter. CPI inflation is seen at 6.6 per cent in October-December, versus the 6.5 per cent projected earlier. In January-March, headline retail inflation is seen at 5.9 per cent versus 5.8 per cent, estimated earlier. For the first quarter of the next financial year, the MPC has retained its inflation forecast at 5 per cent while the price gauge is seen at 5.4 per cent in the second quarter of the next financial year, Dash said. While saying that Consumer Price Index-based inflation is likely to moderate going ahead, Dash stressed on persistent price pressures and the stickiness of core inflation, which strips away the volatile components of food and fuel. The medium-term inflation target is exposed to heightened uncertainties…further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the core inflation persistence and contain second-round effects, Dash said. Repeatedly emphasizing the importance of bringing down elevated core inflation, Dash said the metric was the “main risk” at the moment. He said that while food inflation is likely to moderate going ahead, pressure points included prices of cereals, milk and spices. Overall CPI price momentum remains high, he said. Consumer Price Index-based inflation has been elevated for several months due to supply-side disruptions caused by the Covid-19 pandemic and a surge in global commodity prices following Russia’s invasion of Ukraine in late February.