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The Monetary Policy Committe (MPC), the rate setting panel of the Reserve Bank of India, has unanimously decided to hike lending rates by 50 bps to 5.40%, above the pre-pandemic level of 5.15%, RBI Governor Shaktikanta Das announced.
This is the third consecutive rate hike after a 40 basis points in May and 50 basis points increase in June. In all, the RBI has raised the benchmark rate by 1.40 per cent since May this year.
Standing Deposit Facility (SDF) rate has been adjusted to 5.15%. Marginal Standing Facility and bank rate revised to 5.65%. The MPC has retained its stance of ‘withdrawal of accommodation’ as it seeks to roll back pandemic-era measures against rising inflationary pressures
The central bank now sees inflation for Q2 at 7.1%; Q3 at 6.4%, and Q4 at 5.8%. In June policy, the central bank had forecast inflation at 7.5% for Q1, 7.4% for Q2, 6.2% for Q3 and 5.8% for Q4. Growth projections for the first quarter of the ongoing fiscal have been retained at 16.2%, 6.2% for Q2, 4.1% for Q3 and 4% for Q4, with risks broadly balanced, Governor Das said. For Q1 FY24, the projection has been retained at 6.7%.
RBI acknowledged that core inflation (CPI excluding food and fuel) remains at an elevated level despite moderating in May-June due to the full direct impact of the cut in excise duties on petrol and diesel pump prices
Overall system liquidity continues in surplus, with average daily absorption under the LAF at Rs 3.8 lakh crore during June-July. Money supply (M3) and bank credit from commercial banks rose YoY by 7.9% and 14.0%.
India’s foreign exchange reserves were placed at US$ 573.9 billion as on July 29, 2022.
RBI has proposed to enable Bharat Bill Payment System to accept cross-border inward bill payments. This will enable NRIs to undertake bill payments for utilities, education and other such payments on behalf of their families in India. This will benefit the senior citizens in particular, Das said.
To make the Reserve Bank-integrated ombudsman scheme more broad-based, it has been decided to include credit information companies, i.e., CICs, under this framework. Further, with a view to strengthening the internal grievance redress by the CICs themselves, it has been decided to mandate the CICs to have their own internal ombudsman framework.
Standalone Primary Dealers (SPDs) authorized under section 10(1) of FEMA,1999 will also be permitted to undertake Foreign Currency Settled Overnight Indexed Swap (FCS-OIS) transactions directly with non-residents and other market-makers.
In order to give more breadth to the forex market in India, it has been proposed to enable SPDs to offer all foreign exchange market-making facilities as currently permitted to Category-I Authorized Dealers, subject to guidelines.
The decisions taken by the MPC are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.
Elevated risks emanating from protracted geopolitical tensions, the upsurge in global financial market volatility and tightening global financial conditions continue to weigh heavily on the outlook. The appreciation of the US dollar can feed into imported inflation pressures.
Cost pressures are expected to get increasingly transmitted to output prices across the manufacturing and services sectors. The demand for contact-intensive services and the improvement in business and consumer sentiment should bolster discretionary spending and urban consumption. The MPC has noted that inflation is projected to remain above the upper tolerance level of 6% through the first three quarters of 2022-23, entailing the risk of destabilizing inflation
