RBI Monetary Policy: Repo rate hiked 50 basis points, GDP growth estimate unchanged at 7.2%

5 Aug 2022 , 10:36 AM

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announced a 50 basis points hike in repo rate, following its three-day meeting. Repo is the rate at which RBI lends short-term funds to banks. As initial response, the 10-year government bond yield jumped 10 basis points to 7.25% after RBI Governor Shaktikanta Das announced MPC’s decision to withdraw monetary accommodation in the fight against inflation. The decision to hike rate was unanimous with all six members of the MPC voting in favor. Please note, RBI has set a medium-term target for CPI inflation of 4% within a band of +/- 2%.

The Standing Deposit Facility (SDF) stands adjusted to 5.15% post this hike. The marginal standing facility (MSF) rate and the Bank Rate stand at 5.65%.

RBI retained its estimates for FY23 GDP growth and CPI inflation at 7.2% and 6.7%, respectively.

Against the prevailing adverse global environment, the MPC noted that domestic economic activity is resilient and progressing broadly along the lines of the June resolution of the MPC.

GDP growth estimates by RBI

Q1FY23	16.2%
Q2FY23	6.2%
Q3FY23	4.1%
Q4FY23	4.0%

 
“Household inflation expectations have eased, but remain elevated”, said RBI Governor Shaktikanta Das. These estimates factor in price of Indian crude oil basket at $105/barrel.

CPI estimates by RBI

Q2FY23	7.1%
Q3FY23	6.4%
Q4FY23	5.8%

Here are the key highlights of the Governor’s statement:
 
The pandemic and the war have ignited tendencies towards greater fragmentation, reshoring of supply chains and retrenchment of capital flows, which will pose long-term challenges for both globalization and the global economy.

For emerging market economies (EMEs), these risks are magnified as they have to contend with both domestic growth-inflation trade-offs and spillovers from the most synchronized tightening of monetary policy worldwide.
 
On the Indian economy:

• With strong and resilient fundamentals, India is expected to be amongst the fastest growing economies during 2022-23 according to the IMF, with signs of inflation moderating over the course of the year
• Export of goods and services together with remittances are expected to keep the current account deficit within sustainable limits
• The decline in external debt to GDP ratio, net international investment position to GDP ratio and debt service ratio during 2021-22 impart resilience against external shocks
• The financial sector is well capitalized and sound. India’s foreign exchange reserves, supplemented by net forward assets, provide insurance against global spillovers

 
Overall system liquidity is in surplus, average daily absorption under the LAF stood at Rs 3.8 lakh crore during June and July 2022. Money supply (M3) and bank credit from commercial banks grew 7.9% and 14.0%, respectively, on a year-on-year basis.
 
India had foreign exchange reserves of US$ 573.9 billion as on July 29, 2022
 
It is proposed to enable Bharat Bill Payment System to accept cross-border inward bill payments. Such a move will facilitate bill payments for utilities, education, etc. by NRIs on behalf of their families based in India.
 
RBI-integrated ombudsman scheme will now include credit information companies, i.e., CICs. The CICs will have their own internal ombudsman framework.
 
Standalone Primary Dealers (SPDs) authorized under section 10(1) of FEMA,1999 will be permitted to undertake Foreign Currency Settled Overnight Indexed Swap (FCS-OIS) transactions directly with non-residents and other market-makers
 
It is proposed to enable SPDs to offer all foreign exchange market-making facilities as currently permitted to Category-I Authorised Dealers, subject to guidelines.
 
Read the full statement of the Governor https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR652GSFC057426282649F68829CF8C5D34D02C.PDF