The key repo rate, or key lending rate, was raised by the Reserve Bank of India on Wednesday by a smaller 35 basis points to 6.25%, to curb lingering inflation pressures. This is RBI's fifth straight increase in key lending rate.
Our financial system is robust and stable, and our corporates are healthier than before. India is seen as a bright spot in an otherwise gloomy world, said RBI Governor Shaktikanta Das in his policy statement.
RBI has lowered its gross domestic product growth forecast for FY 23 to 6.8% from 7% earlier in the day. Four out of six members of the Monetary Policy Committee in favor of the withdrawal of accommodation continued to focus on pulling out of high levels of cash from the banking system without a stunted growth, as the committee continues to focus on pulling out of high levels of cash from the banking system. Five of the six MPC members voted in favor of the rate hike.
The inflation forecast for October-December 2022 has been raised to 6.6% from 6.5%. The inflation forecast for January-March 2023 has been raised to 5.9% from 5.8%. The inflation forecast for April-June 2023 retained at 5%. In July-September 2023, the inflation of CPI is expected to be 5.4%, said RBI Governor.
The standing deposit facility rate and the marginal standing facility rate were also increased by the same quantum to 6% and 6.5%.
In his statement, the RBI Governor said that core inflation is exhibiting stickiness and further monetary policy action is needed. He said that the banking system remains in surplus.
The MPC was of the opinion that further monetary policy action was needed to keep inflation expectations anchored, break core inflation persistence and contain second round effects, Das said as he announced the monetary policy committee's decision.
Retail inflation fell to 6.77% in October, after staying above the upper end of the RBI's 26% tolerance band all year, down from 7.41% in September and 7% in August.
The MPC's rate hike coincides with expectations that the US Federal Reserve will shift to smaller rate rises at its policy meeting later this month.
Das said that inflation is expected to remain above the 4% midpoint of the RBI's target for the next 12 months.
The RBI has to consider the potential pressure on the rupee if it falls behind expected increases in US rates.
In July-September, India's gross domestic product GDP growth was reported at 6.3%, which was in line with the RBI's forecasts.
Adhil Shetty, CEO, Bankbazaar.com, said RBI's decision to increase the repo rate by 35 BPS to 6.25% is along the expected lines. The decision was taken to tame inflation, which remains above 4%. It is the fifth hike this year, which shows how stubborn the inflationary trends have been. The view is that inflation is moderate, and the rates are close to their peak.