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Wednesday, February 8, 2023

Key Takeaways & Assessment Strategy Behind Reserve Bank Of India’s Monetary Policy Decision

New Delhi: The Reserve Bank of India (RBI) has announced its much-anticipated rate hike — the 4th straight increase in the current cycle. And as most of the analysts predicted, RBI Governor Shaktikanta Das-led six-member Monetary Policy Committee (MPC) has recommended a 50 basis point hike to 5.90 per cent and implemented with immediate effect. As of today, the RBI has now raised rates by 190 basis points since May this year. The next meeting of the MPC is scheduled during December 5-7, 2022.Also Read – 1 Dollar Equals 82 Rupees Soon? Day Not Far Seeing The Indian Rupee's Free Fall

KEY TAKEAWAYS FROM RBI’S MONETARY POLICY DECISION

  • Repo rate under the liquidity adjustment facility (LAF) increased by 50 basis points to 5.90 per cent with immediate effect.
  • Standing deposit facility (SDF) rate stands adjusted to 5.65 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.15 per cent.
  • RBI MPC lowered real GDP growth estimate for FY23 to 7 per cent from 7.2 per cent.
  • MPC decided to remain focused on withdrawal of accommodation to ensure inflation remains within target going forward, supporting growth: RBI
  • In order to counter temporary moderation in liquidity, the 28-day variable reverse repo rate (VRRR) auction merged with 14-day VRRR auction

ASSESSMENT STRATEGY BEHIND RBI’S MONETARY POLICY DECISION

Global economy: Covid-19, Ukraine conflict and aggressive monetary policy actions across the world is weakening global economic activity. These unprecedented financial conditions tighten result in a surge of volatility in global financial markets triggered by sporadic sell-offs in equity and bond markets, and the strengthening of the US dollar to a 20-year high. As a result, emerging market economies (EMEs) face intense pressures from retrenchment of portfolio flows, currency depreciations, reserve losses and financial stability risks, besides the global inflation shock. As external demand deteriorates, their macroeconomic outlook is becoming increasingly adverse. Also Read – Markets Shine Green After RBI rate Hike! Sensex Up By 500 Pts, Nifty Surges Over A 100 Pts

Domestic economy: In Q1 2022-23, India’s real Gross Domestic Product (GDP) grew year-on-year (y-o-y) by 13.5 per cent. Despite all the constituents of domestic aggregate demand expanded y-o-y and exceeded their pre-pandemic levels, the drag from net exports provided an offset. Apart from that, on the supply side, Gross Value Added (GVA) rose by 12.7 per cent in Q1 2022-23, with all constituents recording y-o-y growth and most notably, services. Also Read – BREAKING LIVE Updates On RBI Monetary Policy: RBI Hikes Repo Rate By 50 Basis Points To 5.9%

Improving supply side conditions: Data shows the aggregate supply conditions are improving. The kharif season has been doing pretty well with the south-west monsoon rainfall, 7 per cent above the long period average (LPA), as on September 29, and its spatial distribution spreading to some deficit areas. As on September 23, the acreage was 1.7 per cent above the normal sown area and only 1.2 per cent below last year’s coverage. The production of kharif foodgrains as per first advance estimates (FAE) was 3.9 per cent below last year’s fourth advance estimates (only 0.4 per cent below last year’s FAE). Activity in industry and services sectors remains in expansion, especially the latter, as reflected in purchasing managers indices (PMIs) and other high frequency indicators. The index of industrial production growth, however, slowed to 2.4 per cent (y-o-y) in July.

Increasing demand: Ahead of the festive season, the urban consumption has increased by discretionary spending and rural demand is also gradually improving. The rising imports and domestic production of capital goods, steel consumption and cement production show investment demand is also scaling up. Merchandise exports posted a modest expansion in August. Non-oil non-gold imports remained buoyant.

Increase in CPI inflation: In August 2022, the Consumer Price Index (CPI) inflation rose to 7.0 per cent (y-o-y) in August 2022 from 6.7 per cent in July as food inflation moved higher, driven by prices of cereals, vegetables, pulses, spices and milk. Fuel inflation moderated with reduction in kerosene (PDS) prices, though it remained in double digits. Core CPI (i.e., CPI excluding food and fuel) inflation remained sticky at heightened levels, with upside pressures across various constituent goods and services.

Surplus system liquidity: Overall system liquidity remained in surplus, with the average daily absorption under the liquidity adjustment facility (LAF) easing to ₹2.3 lakh crore during August-September (up to September 28, 2022) from ₹3.8 lakh crore in June-July. Money supply (M3) expanded y-o-y by 8.9 per cent, with aggregate deposits of commercial banks growing by 9.5 per cent and bank credit by 16.2 per cent as on September 9, 2022. India’s foreign exchange reserves were placed at US$ 537.5 billion as on September 23, 2022.

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