The Reserve Bank of India’s Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 5.50% on Wednesday. This is the first hike since February 2023. The MPC pointed to rising inflation pressures and a challenging global economic environment.
The vote was unanimous after a three-day meeting on October 5-7. The MPC also changed its stance to “calibrated tightening”. This means the RBI is no longer considering rate cuts in the near term.
Governor Sanjay Malhotra said the decision was driven by the changing inflation outlook. He said the Indian economy remains resilient. He also said inflation and its outlook are not as benign as they were last year. Headline CPI inflation is expected to average around 5.8% over the next three quarters. For the full financial year, it is projected at 4.4%.
The RBI listed several global factors: higher food and energy prices, market volatility and tighter financial conditions. Malhotra said global growth is resilient but should slow this year. Major central banks are tightening as global inflation rises. Trade uncertainty, rising bond yields in advanced economies and a stronger US dollar are also keeping markets nervous.
The MPC saw some evidence of higher inflation expectations and broader price pressures. It saw limited signs that supply-side pressures have entered firms’ pricing. It also flagged risks from strong growth in money and credit. It found limited evidence of demand-side inflation.
Malhotra said rate cuts are off the table for now. The next move can only be a hike or a pause. The RBI is not promising more hikes. The length and size of the cycle will depend on growth and inflation. The RBI will watch underlying inflation, how widely price pressures spread, second-round effects of supply shocks and demand conditions.
SOURCE: INDIA TODAY
