RBI increases repo rate by 35 bps to 6.25 per cent; GDP growth estimated at 6.8 per cent

Continuing its stance of keeping inflation under control, the Reserve Bank of India (RBI) has increased the repo rate by 35 basis points (bps) to 6.25 per cent with immediate effect. The repo rate increase was announced after the meeting of the RBI Monetary Policy Committee (MPC). Banks are almost certain to increase the interest rates after the RBI decision, resulting in a hike in the home loans, auto loans and other loan rates. RBI has projected retail (Consumer Price Index or CPI) inflation at 6.7 per cent and the real gross domestic product (GDP) growth at 6.8 per cent in 2022-23.

The RBI statement says that the MPC decisions are in consonance with the objective of achieving the medium-term target for CPI inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

RBI has said that global growth is set to lose momentum as monetary policy actions tighten financial conditions and as consumer confidence weakens with the rising cost of livelihood. Inflation remains elevated and persistent across countries as they grapple with food and energy price shocks and shortages.

The conditions of the global economy may also have an impact on our growth prospects. On the domestic front, real GDP increased by 6.3 per cent year-on-year (y-o-y) in Q2 FY23.  In Q3, economic activity is exhibiting resilience. In the agricultural sector, a pick-up in Rabi sowing is supported by the good progress of the northeast monsoon and above-average reservoir levels. Activity in the industry and services sectors is in expansion mode, as reflected in purchasing managers’ indices (PMIs) and other high-frequency indicators. Besides, CPI inflation moderated to 6.8 per cent (y-o-y) in October 2022 from 7.4 per cent in September.

RBI has said that taking into account domestic and global factors, CPI inflation is projected at 6.7 per cent in 2022-23. It is projected to reduce to 5.0 per cent in Q1 FY24 and remain at 5.4 per cent in Q2. The agricultural outlook has brightened, with the prospects of a good Rabi harvest. The sustained rebound in contact-intensive sectors is supporting urban consumption. Taking these and other factors into consideration, the real GDP growth for 2022-23 is projected at 6.8 per cent. Real GDP growth is projected at 7.1 per cent for Q1 in FY24.

Dr Shashanka Bhide, Dr Ashima Goyal, Dr Rajiv Ranjan, Dr Michael Debabrata Patra and Shaktikanta Das voted to increase the policy repo rate by 35 basis points. Prof. Jayanth R Varma voted against the repo rate hike.