RBI hikes repo rate by 35 bps, taking it to 6.25% – Das says bank has ‘Arjuna’s eye’ on inflation

RBI hikes repo rate by 35 bps, taking it to 6.25% – Das says bank has ‘Arjuna’s eye’ on inflation
RBI governor Shaktikanta Das announced a 35 basis points rate hike on WednesdayBCCL
  • The Reserve Bank of India has increased repo rates five times this year, with the total quantum now at 225 basis points.
  • RBI governor Shaktikanta Das kept the inflation target for FY23 unchanged at 6.7%, and said inflation should cool down to 5.4% by the end of Q2 FY24.
  • Overall, the central banker said the MPC action going forward will be calibrated to keep inflation under control while supporting growth.
Reserve Bank of India (RBI) governor Shaktikanta Das on Wednesday announced an interest rate increase of 35 basis points, the fifth rate hike since May this year, taking the total quantum of rate hikes to 225 bps.

With this hike, the repo rate now stands at 6.25%, up from 5.9% earlier, while the standing deposit facility (SDF) rate is now at 6%, up from 5.65% earlier.

This rate hike decision was taken by a majority of five out of the six members.

“India is seen as a bright spot in an otherwise gloomy global outlook but global spillovers continue to impart volatility,” Das said.

RBI has hiked repo rates five times this year so far, starting with a 40 bps hike in May, followed by three consecutive 50 bps hikes each in June, August, and September.


‘Arjuna’s eye on inflation’

Das underlined that the inflation trajectory has evolved largely in line with the outlook given by the central bank in June. However, he said that core inflation (CPI) excluding food and fuel remains sticky.

Overall, though, Das said he expects food inflation to soften. “Going forward, food inflation is likely to moderate with the usual winter softening and the likelihood of a bountiful rabi harvest, but pressure points remain in the form of prices of cereals, milk and spices,” he said.

Das added that due to the geopolitical uncertainty and financial market volatility, further calibrated monetary policy action is needed to keep inflation expectations “anchored”, saying that the RBI will keep “Arjuna’s eye” on inflation and react as needed.

RBI has kept the inflation target for FY23 unchanged at 6.7% – the Q3 target is at 6.9%, and Q4 at 5.9%. Further in FY24, Das said he expects inflation to come in at 5% in Q1, and 5.4% in Q2 on the assumption of a normal monsoon.


‘Not fully done with rate hike cycle’

Most analysts had predicted that there would be a rate hike though it would not be as high as 50 basis points. The market was also expecting to hear about RBI’s monetary stance going forward.

“The MPC also decided by a majority of four out of six members to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth,” Das said.

While retail inflation has come down to 6.77% in October from 7.41% in September, it is still above RBI’s upper tolerance level of 6%.

“The stance remained focused on withdrawal of accommodation. While this was ours as well market consensus, it seems like we may not be fully done with the rate hiking cycle. The inflation guard continues to remain. Key to now track FOMC outcome in the coming week. Expect bond markets to give up some gains and trade range bound as global growth concerns dominate,” said Lakshmi Iyer, CEO - Investment Advisory, Kotak Investment Advisors.


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