RBI hikes repo rate by 50 bps to 4.90% as inflation starts to bite

Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.65 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 5.15 per cent, an RBI release stated.

The RBI also stated that it would remain focused on withdrawal of an accommodative monetary policy to ensure that inflation remains within the target going forward, while supporting growth.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth, it added.

RBI said the MPC decision was based on an assessment of the current and evolving macroeconomic situation, especially the growing levels of inflation – within and outside the economy. 

Since the MPC’s meeting in May, the global economy continued to grapple with multi-decadal high inflation and slowing growth, persisting geopolitical tensions and sanctions, elevated prices of crude oil and other commodities and lingering Covid-19 related supply chain bottlenecks. 

The pandemic and the economic turbulence it had brought in have roiled global financial markets, leading to a tightening of global financial conditions and risks to the growth outlook and financial stability, amidst growing concerns of stagflation, RBI pointed out.

Real GDP growth in India decelerated to 4.1 per cent in the fourth quarter of the 2021-22 fiscal, from 5.4 per cent in Q3, dragged down mainly by weakness in private consumption on the back of the Omicron wave.

However, RBI noted a broadening of the recovery in economic activity in April-May 2022 with a recovery in urban demand and a gradual recovering and rural demand. 

Merchandise exports from the country have been steadily posting double-digit growth for the fifteenth month in a row, imports into the country swelled with continued expansion of non-oil non-gold imports.

While overall system liquidity remained in large surplus, the average daily absorption under the LAF moderated to Rs5.5 lakh crore during 4 - 31 May 2022 from Rs7.4 lakh crore during 8 April - 3 May in consonance with the policy of gradual withdrawal of accommodation. Money supply (M3) and bank credit from commercial banks rose 8.8 per cent and 12.1 per cent, respectively, as on 20 May 2022. 

India’s foreign exchange reserves were placed at $601.4 billion as on 27 May 2022.

Headline consumer price inflation rose further from 7.0 per cent in March 2022 to 7.8 per cent in April 2022, reflecting broad-based increase in all its major constituents. Inflation pressures accentuated, driven by food and fuel prices. Core inflation (ie, CPI excluding food and fuel) hardened across almost all components, dominated by the transport and communication sub-group.

RBI expects the tense global geopolitical situation and the consequent elevated commodity prices impart considerable uncertainty to the domestic inflation outlook. The restrictions on wheat exports should, however, improve the domestic supplies but the shortfall in the rabi production due to the heat wave could be an offsetting risk. The forecast of a normal south-west monsoon augurs well for the kharif agricultural production and the food price outlook. Edible oil prices remain under pressure on adverse global supply conditions, notwithstanding some recent correction due to the lifting of export ban by a major supplier. Consequent to the recent reduction in excise duties, domestic retail prices of petroleum products have moderated. International crude oil prices, however, remain elevated, with risks of further pass-through to domestic pump prices, RBI said.