Adjusted for inflation, policy rate still remains accommodative

MUMBAI: In the concluding meeting of the Monetary Policy Committee (MPC) on Wednesday, five out of its six members decided to opt for raising the policy repo rate by 35 basis points to 6.25 per cent, with immediate effect, RBI Governor Shaktikanta Das announced. Repo rate is the rate at which the Reserve Bank of India lends to the banks.

Consequently, RBI Governor said the standing deposit facility (SDF) rate stands adjusted to 6 per cent, and the marginal standing facility (MSF) rate and the bank rate to 6.50 per cent. As regards the stance of monetary policy, the Governor said the MPC took a holistic view of the policy rate and liquidity conditions relative to inflation. Adjusted for inflation, the policy rate still remains accommodative.

The MPC also decided by a majority of four out of six members to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. The Governor elaborated on the MPC's rationale behind these decisions on the policy rate and the stance. Growth prospects across the world are dampening, he said, adding that financial markets remain nervous and are characterised by high volatility and price swings.

Shaktikanta Das said for the Indian economy, the outlook is supported by good progress of rabi-sowing, sustained urban demand, improving rural demand, a pick-up in manufacturing, rebound in services and robust credit expansion. "Consumer price inflation moderated to 6.8 per cent (y-o-y) in October as expected, but it still remains above the upper tolerance band of the target. Core inflation is exhibiting stickiness." On balance, he said the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second-round effects. These actions will strengthen the medium-term growth prospects of the Indian economy. Accordingly, the MPC decided to increase the rate and to remain focused on the withdrawal of accommodation, while supporting growth.

Over the next 12 months, the Governor said inflation is expected to remain higher than the 4 per cent target. "System liquidity remains in surplus with an average daily absorption under the liquidity adjustment facility (LAF) of Rs 1.6 lakh crore in November 2022. Since then, it has gone up to Rs 2.6 lakh crore as on 5th December," he added. He said that the overall monetary and liquidity conditions remained accommodative and hence, the MPC decided to remain focused on the withdrawal of accommodation.

According to the latest data released by National Statistical Office (NSO), real gross domestic product (GDP) posted a growth of 6.3 per cent year-on-year (y-o-y) in Q2:2022-23, driven primarily by private consumption and investment. This is in line with our expectations. The governor also said investment activity will get support from government capex, going ahead. A pick-up in the share of fixed assets in total assets of manufacturing companies was visible in the first half of the year (H1).

He said according to surveys, consumer confidence has improved further. Manufacturing and infrastructure sector firms are optimistic about the business outlook. Services sector firms also expect activity to expand. In an interconnected world, the Governor said the country cannot remain entirely decoupled from adverse spillovers from the global slowdown and its negative impact on our net exports and overall economic activity. "The biggest risks to the outlook continue to be the headwinds emanating from protracted geopolitical tensions, global slowdown and tightening of global financial conditions," he added.

In his summary, he said GDP growth in India remains resilient and inflation is expected to moderate; but the battle against inflation is not over and added pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain. While being watchful of the impact of our earlier monetary policy actions, the Governor said the central bank will keep "Arjuna's eye" on the evolving inflation dynamics and be ready to act as may be necessary. "Our actions will be nimble and in the best interest of the economy. The aspect of growth will obviously be kept in mind," he said.

An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth. The RBI has been on an accommodative stance for the last two years to support the economy during the Covid-19 crisis.