RBI to focus on withdrawal of accommodation

After announcing the repo rate hike, the RBI governor Shaktikanta Das hints that the war on inflation is far from over with core inflation remains sticky and food inflation stays exposed to global factors.

The monetary policy committee of the Reserve Bank of India (RBI) raised the repo rate by 50 basis points to 4.9 per cent and vowed to withdraw accommodative policies to bring down inflation to its tolerance level of 6%. The committee also raised its inflation projection for financial year 2022-23 to 6.7%.

The repo rate is the rate at which the RBI offers short-term funds to banks. The RBI had, in an off-cycle monetary policy review, raised the repo rate by 40 basis points to 4.4%, the first increase in policy rates in two years. The standing deposit facility rate was adjusted to 4.65% and the marginal standing facility and the bank rate to 5.15%.

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Growth forecast retained

The RBI did not alter its growth forecast of 7.2% for 2022-23 citing a recovery of consumer demand in urban areas and the hopes of a good monsoon. RBI Governor Shaktikanta Das said the central bank will continue its policies supporting economic growth. The apex bank expects the economy to expand 16.2% in the first quarter of 2022-23, but sees the growth tapering to 4% in the last quarter. The economy grew 4.1% in the fourth quarter of the last fiscal.

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The committee noted that the global economy is still grappling with high inflation and slowing growth due to high prices of commodities such as crude oil and the supply chain disruptions caused by the Russia-Ukraine war and the Covid-19 pandemic. Some of the largest economies are in the shadow of a stagflation.

The committee cited data for the April-May 2022 period that indicate a broader economic recovery. It said the urban demand is recovering and the rural demand is showing a gradual recovery. Exports continued to grow for the fifteenth month running, and imports expanded steadily, indicating a recovery in demand.

The retail inflation, measured in terms of the consumer price index, rose from 7% in March to 7.8% in April. Food and fuel inflation were the main contributors. The elevated commodity prices created uncertainty in domestic prices.

RBI policy highlights

• Repo rate raised by 50 basis points to 4.90 per cent.

• The RBI to focus on withdrawal of accommodation.

• Retains growth forecast for FY 2022-23 at 7.2%.

• Raises inflation projection to 6.7% for the financial year.