RBI Hikes Interest Rates by 25bps, Hints at More to Come on Inflation Concerns

Mumbai: The Reserve Bank of India (RBI) slowed the pace of interest-rate increases for the second straight time when it on Wednesday expectedly increased borrowing cost by 25 basis points (bps) but hinted more to come as core inflation remained high.

The RBI's six-member Monetary Policy Committee voted 4-2 to raise the benchmark repurchase or repo rate to 6.50% and retain its stance of withdrawing accommodation, which was adopted early last year.

This is the sixth straight increase in interest rates since May last year and the cumulative hike now totals 250 bps.

The RBI raised interest rates by 35 bps in December 2022. Rates were hiked by 40 bps in May and 50 basis points hike each in June, August and September.

"The stickiness of core or underlying inflation is a matter of concern. We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bring down CPI headline inflation," RBI Governor Shaktikanta Das said while announcing the committee's decision.

Adjusted for inflation, the policy rate still trails its pre-pandemic levels, Das said, adding liquidity remains in surplus.

The consumer price inflation (CPI) forecast was lowered to 6.5% for the current fiscal from 6.7%.

While inflation is expected to moderate in 2023-24, it is likely to rule above the 4% target.

The retail inflation rate eased to 5.72% in December from 5.88% in the previous month, falling below the RBI's upper tolerance band of 2-6% for a second straight month, though core inflation, which excludes more volatile food and fuel prices, was still running at 6.1%.

"Going ahead, the food inflation outlook will benefit from a likely bumper rabi harvest led by wheat and oilseeds," Das said.

 GDP Projected at 6.4%

The RBI projected GDP growth of 6.4% in the fiscal year starting April 1 (2023-24), down from 7% in the current year, with Das saying the Indian economy remains resilient in the face of considerable uncertainties on global commodity prices.

"The global economic outlook does not look as grim now as it did a few months ago. Growth prospects in major economies have improved, while inflation is on a descent though still remains well above target in major economies. The situation remains fluid and uncertain," he said. "Commodity prices may remain firm with the easing of COVID-19 related restrictions in some parts of the world."

Among the measures announced on Wednesday was allowing lending and borrowing of government securities or G-secs with a view to "provide investors with an avenue to deploy their idle securities, enhance portfolio returns and facilitate wider participation".

"This measure will also add depth and liquidity to the G-sec market; aid efficient price discovery; and work towards a smooth completion of the market borrowing programme of the centre and states," Das said.

The RBI also restored market hours for the Government Securities market to the pre-pandemic timing of 9 am to 5 pm.