The RBI’s monetary policy committee today chose to raise its benchmark rate, or repo, by 0.5 percentage points to push it up to 5.9%. This was in line with market expectations.
A closer look at the details of the policy and accompanying research shows that the increase in the repo rate by 1.9 percentage points in less than five months is not unanimous within the MPC. For the first time since the current round of repo rate hikes began in May, all MPC members did not vote for the same level of hike. Ashima Goyal, an outside member, voted to increase the rate by just 0.35 percentage points.
Put this difference in the MPC along with other data and the level of uncertainty RBI is facing becomes evident.
The accompanying document on the drivers of inflation shows that the increase in the price level between April and September is mainly due to the shocks on the supply side of food and fuel. Weak aggregate demand held back inflation.
Repurchase increases quickly pass on to retail bank loans and MSMEs as they are compared to repo. This, in turn, weakens demand. The impact of repo hikes and weak global demand impacted India’s GDP forecast. RBI today scored it at 7% for 2022-23 from 7.2% forecast two months ago. In February, the GDP forecast for 2022-23 was 7.8%.
If the main driver of inflation comes from the supply side, the question arises as to whether the speed of interest rate hikes should be moderate as aggregate demand is one of the main drivers of domestic economic growth.
Also read: RBI raises repo rate by 50bps to 5.9%; sets GDP growth at 7% for FY23
RBI’s real-time monetary policy updates: EMIs set to rise as RBI raises repo rate by 50bps to 5.9%
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