Wednesday, 09 Oct, 2024
By: Yash Gupte
The Union Budget 2023–24 was presented in Parliament by Finance Minister Nirmala Sitharaman, and this is the first MPC meeting since the presentation of the budget. Image Source: IANS
This is the sixth repo rate hike by the central bank. Prior to this, the RBI had raised the repo rate by 35 basis points 50 basis points in September, 50 basis points in August, 50 basis points twice in June and 40 basis points in May.
The Reserve Bank of India’s (RBI) monetary policy committee (MPC) on Wednesday, February 8, 2023 hiked the repo rate/ lending rate by 25 basis points to 6.50 percent with immediate effect. The decision was announced by Shaktikanta Das, the governor of RBI in a press conference held on Wednesday. This is the sixth repo rate hike by the central bank. Prior to this, the RBI had raised the repo rate by 35 basis points 50 basis points in September, 50 basis points in August, 50 basis points twice in June and 40 basis points in May.
The RBI also predicted that inflation would continue to be over the 4 percent target and stated that it is anticipated to average 5.6 percent in the fourth quarter of 2023–2024. The Union Budget 2023–24 was presented in Parliament by Finance Minister Nirmala Sitharaman, and this is the first MPC meeting since the presentation of the budget. The meeting of the Monetary Policy Committee took place from February 6 to February 8. The central bank further stated that a 6.4 percent GDP growth rate is anticipated for 2023–2024.
It should be noted that the increase in the repo rate is mainly driven by the external factors like the disruption in global supply chains and uncertain geopolitical atmosphere created by the Russia- Ukraine war. The inflation rate in December 2022 had dropped to a twelve month low at 5.72 percent. The inflation rate had peaked in April 2022 at 7.79 percent. The fall in retail inflation indicates that the steps taken by Reserve Bank of India (RBI) to control the rising inflation in the country have delivered success. The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The retail inflation has come down to its lowest level since December 2021. November has been the first month in the calendar year 2022 which has witnessed the CPI falling below the 6 percent mark.
The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was last time increased in December by the Monetary Policy Committee (MPC) by 35 basis points (bps), bringing it to 6.25 percent and today the central bank has again increased it by 25 bps to 6.50 percent. The MPC has increased the benchmark interest rate by 250 basis points so far this fiscal year in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.
The chart below shows the CPI from January to December 2022.
The inflation rate crossed the RBI’s threshold of 6 percent in January (6.01 percent), which quickly jumped to 6.95 percent in March and hit the peak at 7.79 percent in April. This indicates that the prices of goods and services increased drastically in March and April. The primary reason behind the drastic increase was the disruption in supply chains caused by the Russia-Ukraine conflict.There was a drop in CPI in May, June and July as the government banned the export of wheat and sugar in order to increase its availability in the local market and cool down its prices.
However, the trend reversed in August when inflation rate again jumped to 7.00 percent, further escalating to 7.41 percent in September. The CPI had remained above 6 percent for the tenth consecutive month in October. Factors like rise in food prices, domestic fuel price level and pressure on the Indian currency contribute to the rise in inflation. The retail inflation measured by the CPI came down below the mark of 6 percent in November for the first time in 2022. The fall in food prices and the implementation of the RBI’s tight monetary policy under which it has been increasing the repo rate has contributed in the decline in retail inflation in the month of November and December.
Shaktikanta Das, Governor of the Reserve Bank of India, said “Looking ahead, while inflation is expected to moderate in 2023-24, it is likely to remain above the 4 percent target. The outlook is clouded by continuing uncertainties from geopolitical tensions, global financial market volatility, rising non-oil commodity prices and volatile crude oil prices.”
