There are expectations that the MPC will raise rates in its next meeting as well, though the quantum of the hike may be of a lower magnitude.In line with expectations, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) voted to raise the benchmark policy repo rate by 50 basis points in its September policy meeting. The repo rate now stands at 5.9 per cent. Taking this decision into consideration, the cumulative interest rate hikes by the MPC, since it pivoted to tightening policy rates, now stand at 190 basis points. While the decision was not unanimous — MPC member Ashima Goyal voted in favour of increasing the repo rate by 35 basis points — the resolution noted that “further calibrated monetary policy action is warranted to keep inflation expectations anchored, restrain the broadening of price pressures and pre-empt second round effects.”
The latest policy signaled that the RBI’s outlook on inflation and growth has not changed significantly since its last meeting — the central bank has retained its forecast for inflation this year, and has only marginally lowered its estimate of growth. On inflation, the RBI continues to expect the consumer price index at 6.7 per cent for 2022-23 (6.5 per cent in the third quarter and 5.8 per cent in the fourth quarter), trending down further to 5 per cent in the first quarter of the next financial year. While there continues to be uncertainty over the trajectory of inflation — there are considerable upside and downside risks largely from food and commodity prices — the latest forecast only reinforces the view that the central bank does not expect inflation to fall in line with its target over the medium term. On the economic front, with the GDP growing at a slower pace than expected in the first quarter, the RBI has lowered its estimate for growth for the full year to 7 per cent now, down 20 basis points from its earlier estimate of 7.2 per cent.
In the run-up to this MPC meeting, there was considerable discussion, especially after the US Federal Reserve signaled a more hawkish stance, on the extent to which the MPC would tighten policy further and whether the quantum of rate hikes would ease in subsequent meetings. In his comments, RBI Governor Shaktikanta Das noted that even as the policy rate has been raised by 190 basis points, when inflation is taken into consideration, it trails the 2019 levels. “Monetary and liquidity conditions, therefore, remain accommodative”, he noted. Considering that the MPC has also “decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target,” this indicates more policy tightening in the pipeline. Thus, there are expectations that the MPC will raise rates in its next meeting as well, though the quantum of the hike may be of a lower magnitude.