The Reserve Bank of India on Wednesday raised its key repo rate by a quarter percentage point. As expected but left the door open to further tightening, surprising markets. With core inflation RBI remaining high.The central bank said its policy stance focused on easing housing, with. Four out of six members voting in favor of that position.
Most analysts had expected a hike on Wednesday to be the final hike. Fn the RBI’s current tightening cycle, which saw it raise rates by 250 bps since May last year.
The Monetary Policy Committee (MPC), comprising three members of the central bank. And three external members, raised the key lending rate or repo rate to 6.50% in a split decision.
Four out of six members voted in favor of the move.
Announcing the committee’s decision, RBI Governor Shaktikanta Das said. The stickiness of core or underlying inflation is a concern. We need to see a decisive moderation in inflation. We need to stick to our commitment to reduce inflation.”
While the effects of earlier rate hikes are still working their way through the economy. More calibrated monetary policy action is needed, Das added.
In a survey conducted ahead of the federal budget on February 1, more than three-quarters of economists, 40 out of 52. Expected the RBI to raise the repo rate by 25 bps. The remaining 12 predict no change.
Das said that inflation-adjusted, real interest rates remain below pre-pandemic levels. And there is a liquidity surplus, though lower than during the pandemic.
The RBI brought down the liquidity surplus in the banking system from around 9-10 trillion rupees. To below 2 trillion rupees ($24.19 billion) following the pandemic-related support measures.
A growing number of central banks around the world have signaled a pause or halt. In their tightening in recent weeks as consumer inflation comes off. The boil and growth in their economies shows signs of softening.
India’s annual retail inflation rate eased to 5.72% in December from 5.88% in RBI the previous month. Talling below the RBI’s upper tolerance band of 2%-6% for the second month in a row, though core inflation. Which is more volatile in food and fuel, Excludes price. , was still running at 6.1%.
Consumer price inflation is estimated to be 6.5% in FY2023 and 5.3% in FY2024.
“It seems reasonable to conclude that as long as (some) inflation does not appear. To be under threat of falling below 6% and staying there for several months. We cannot rule out further rate hikes,” ING’s Economists say. A note.
“So we will revise our forecast and add another 25 bps, taking the highest policy rate after this latest hike to 6.75%. And pushing back the timing of the final rate cut until next year.”
Capital Economics also said that another 25 bps rate hike in April is clearly likely. But much will depend on inflation readings in January and February.
Das added that the Indian economy looks resilient despite considerable. Uncertainty over global commodity prices. RBI has projected a growth rate of 6.4% for FY24.
“The global economic outlook does not look as dire as it did a few months ago. Growth prospects in major economies have improved, while inflation. Has eased although still above target in major economies. The situation remains fluid RBI and uncertain,” Das said.
The Indian rupee was little changed at 82.69 to the US dollar as against 82.67 before the policy announcement. It briefly rose to 82.62 after RBI withdrew its accommodation stance.
The benchmark bond yield was 7.3391% against the previous close of 7.3124% and 7.3102% before the policy decision.
The Nifty 50 index was up 0.78% at 17,860.50 at 11:39 am IST, while the S&P BSE Sensex was up 0.69% at 60,701.39.