RBI hikes interest rate by 25 bps to 6.5%, says core inflation remains ‘sticky’

• RBI hikes base interest rates by 25 basis points.
• The rate hikes since May 2022 are still working their way through the system, Das said.
• Das also projected the real GDP growth for FY24 at 6.4%.

The Reserve Bank of India governor Shaktikanta Das on Wednesday increased the base interest rates by 25 basis points to 6.5% in line with expectations, making it the sixth such hike since May 2022. With this, the total quantum of rate hikes announced in the same period has reached 250 basis points.

Since last May, the RBI governor raised base interest rates five times, totaling 225 basis points and taking the repo rate from 4% to 6.25%. The last such rate hike was announced in December 2022 at 35 basis points, with the central bank saying that it has ‘Arjuna’s eye’ on inflation.

“The rate hikes since May 2022 are still working their way through the system. On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospects,” Das said.

CPI (consumer price index) inflation cooled down to 5.72% in December, hitting a 12-month low. Das said that he expects it to further cool down in the March quarter to 5.7%, down from 6.34% in the same period last year.

Rate hikes not over yet

Das also outlined that the overall monetary conditions are still accommodative. Coupled with sticky core inflation, it makes a case for further monetary policy action, he noted.

“Adjusted for inflation, the policy rate still trails its pre-pandemic levels,” Das said, adding that we need an unwavering commitment to bring down inflation. “The 25 basis point rate hike is seen as appropriate. Reduction in the size of rate hike lets us evaluate the effect of rate hikes taken so far,” he said.

Das projected the real GDP growth for FY24 at 6.4%. He also projected that CPI inflation would be at 5.3% for FY24, adding that inflation for FY23 would be at 6.5%, down from its previous projection of 6.7%. However, it is still above the central bank’s upper tolerance limit of 6%.

Outlook clouded by uncertain geopolitical tensions, says Das

Inflation has cooled down significantly in November and December, but Das said that it still remains above the RBI’s 4% target. He also underlined that an uncertain geopolitical environment means that the central bank will continue to keep a close eye on inflation and accordingly calibrate its rate hike action.

“The outlook is clouded by uncertainties from geopolitical tensions, global financial market volatility, rise in non-commodity prices and volatile crude oil prices,” Das said.

However, he remained optimistic about the Indian economy’s prospects, saying “Available data for Q3 and Q4 of FY23 indicate that economic activity in India remains resilient. Urban consumption demand has been firming up, driven by a sustained recovery in discretionary spending.”

Das also saw silver linings in rural demand recovery, primarily on account of tractor and two-wheeler sales in December.

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