RBI hikes lending rate by 35 basis points to 6.25%

Mumbai: The RBI's Monetary Policy Committee on Wednesday raised its key lending rate by 35 basis points to 6.25 per cent as inflation has started showing signs of easing and economic growth tapering.

Repo rate is the rate at which the RBI lends money to commercial banks. Repo rate is used by monetary authorities to control inflation. Increase in the repo rate means the cost of funds for banks will go up. In other words, this will disincentives banks from borrowing from the central bank.
This will reduce the money supply in the economy and arrest inflation.
Repo and reverse repo are part of RBI's liquidity adjustment facilities.

With the latest hike, the repo rate or the short-term lending rate at which banks borrow from the central bank now has crossed 6 per cent.

This is the fifth consecutive rate hike after a 40 basis points increase in May and 50 basis points hike each in June, August and September. In all, the RBI has raised the benchmark rate by 2.25 per cent since May this year.

The six-member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das decided by majority view in favour of the rate hike.

The inflation factor

The Consumer Price Index (CPI) based inflation, which RBI factors in while fixing its benchmark rate, stood at 6.7 per cent in October. Retail inflation has been ruling above the RBI's comfort level of 6 per cent since January this year.

Das retained the inflation projection at 6.7 per cent for the current fiscal.

GDP forecast

The RBI has slashed its GDP growth forecast to 6.8 per cent from an earlier estimate of 7 per cent for the current fiscal.

In its last bi-monthly policy review released in September, the RBI had slashed the economic growth projection for the current financial year to 7 per cent from 7.2 per cent earlier on account of extended geopolitical tensions and aggressive monetary policy tightening globally.

However, despite the downward revision in the economic growth projection, India will remain among the fastest growing major economies in the world, said RBI Governor Shaktikanta Das while announcing the latest bi-monthly monetary policy.

He said the Indian economy remains resilient and is a bright spot in a gloomy world.

It is to be noted that the RBI had also pared its growth projection in September as well.

The World Bank on Tuesday revised upwards its GDP growth forecast for India to 6.9 per cent for 2022-23 from its earlier estimate of 6.5 per cent, saying the economy was showing higher resilience to global shocks.

'Resilient rupee'

"The story of the rupee has been one of India's resilience and stability," the Governor said while pointing out that the appreciation of the US dollar this year, which precipitated large-scale depreciation of all major global currencies including the Indian rupee, has drawn wide attention.

Das also stressed it is important to make an objective assessment of the movement of the Rupee in the context of global and domestic macroeconomic and financial market developments.

"Through this episode of US dollar appreciation, the rupee's movements have been the least disruptive, relative to peers," the Governor added.

'Comfortable forex reserves'

He also said the size of forex reserves is comfortable and has also increased. It has gone up from $ 524.5 billion on October 21, 2022 to $ 561.2 billion as on December 2, 2022 covering around nine months of projected imports for 2022-23.

Further, India's external debt ratios are low by international standards.

Noting that at a time when slowing global demand is weighing on India's merchandise exports, Das said the country's services exports remained robust and remittances are scaling new heights.

The net balance under services and remittances remains in large surplus, partly offsetting the trade deficit.

Consequently, even if the current account deficit is higher than 2021-22, it is eminently manageable and within the parameters of viability, the Governor said.

Net foreign direct investment (FDI) flows have remained robust and rose to $ 22.7 billion during April-October 2022, from $ 21.3 billion in the corresponding period last year.

Foreign portfolio flows have resumed in recent months and were positive at $ 11.8 billion during July to December 5, 2022, led by equity flows.

(With PTI inputs.)