Inflation fight RBI hikes repo rate

Subject: Economy

Context:

Inflation fight – RBI hikes repo rate by 50 bps, RBI Governor blames it on ‘new storm’.

Steps taken

Policy focus on withdrawal of accommodation, cuts FY23 growth to 7%
Faced with the challenge of elevated retail inflation and a ‘storm’ arising from the aggressive monetary policy actions of advanced economy central banks, the six-member Monetary Policy Committee (MPC) decided by a majority of 5 to 1 to raise the policy repo rate by 50 basis points as also to remain focussed on withdrawal of accommodation.
The latest hike, which was widely expected, takes the repo rate to 5.90 per cent from 5.40 per cent. With this, the MPC has cumulatively raised the repo rate by 190 bps (40 bps in May, followed by 50 bps each in the following three meetings) since May.

In the last two-and-half years, the world has witnessed two major shocks — the Covid-19 pandemic and the conflict in Ukraine.
Now, we are in the midst of a third major shock, a storm, arising from aggressive monetary policy actions and even more aggressive communications from advanced economy central banks.

Domestic factors:

The Governor emphasised that the MPC’s decision continues to be, and will be, guided by domestic factors.
The decisions are based on the twin objectives of inflation and growth, with primacy being given to price stability, followed by the necessity to keep growth in mind.
The domestic inflation remains high (hovering around 7 per cent and the RBI expects it to remain elevated at around 6 per cent in the second half of FY23, too), though expected to moderate.
The RBI has cut the real GDP growth projection for 2022-23 to 7 per cent from 7.2 per cent even as it retained the retail inflation projection at 6.7 per cent in 2022-23.