RBI monetary policy: Interest rate hike, inflation forecast and other key takeaways

The Reserve Bank of India (RBI) on Wednesday raised the benchmark lending rate by 50 basis points (bps), or 0.5%, just weeks after it sprung a surprise by increasing the rate by 40 bps. 

With the latest hike, the benchmark report rate has now increased to 4.9% from 4.4% before. 

The RBI’s monetary policy committee (MPC), led by governor Shaktikanta Das, voted 6-0 in favour of the rate hike, even as the central bank decided to keep its stance as “withdrawal of accommodation.”

The monetary policy accommodation withdrawal will be calibrated keeping in mind requirements of economy, the RBI said.

Key highlights of the RBI meeting

1. RBI said the real Gross Domestic Product (GDP) growth forecast for 2022-23 has been retained at 7.2%
2. Inflation projected at 6.7% for the current financial year
3. Inflation for April-June revised to 7.5% from 6.3%
4. Inflation for July-September revised to 7.4% from 5.8%
5. Inflation for October-December revised to 6.2% from 5.4%
6. Inflation for January-March 2023 revised to 5.8% from 5.1%
7. MSF rate and bank rate raised to 5.15% from 4.65

What did the RBI say about inflation?

Governor Das said that the war in Ukraine had led to the globalisation of inflation.

Higher inflation has been a concern for central banks all over including India's as the uncertain nature of the Russia-Ukraine war has compounded supply side disruptions.

Higher food and fuel prices pushed India's retail inflation to 7.8% in April.

Wholesale prices remaining in double digits continuously for 13 months is adding more pressure to RBI's inflation fight as fears of it spilling over to retail prices have increased.

The RBI’s inflation forecast assumes normal monsoon and a price of $105 per barrel for the Indian crude oil basket. It also does not take into account MPC’s actions today.

What did the central bank say on economic demand?

The RBI said that information for April-May suggests domestic economic recovery is firm. While urban demand is recovering, rural demand is gradually improving. Surveys show capacity utilisation in the manufacturing sector increased to 74.5% in January-March, the RBI noted.

What new regulatory measures has the central bank suggested? 

1. Limits for individual housing loans extended by state and rural banks revised upwards by over 100%.
2. Rural cooperative banks can now extend finance for residential housing projects
3. Urban cooperative banks will now begin doorstep banking services to customers
4. The central bank also allowed linking of credit cards to the UPI platform.