Amid geopolitical uncertainty and supply chain glitches, the central bank abandoned forward guidance but said that monetary policy will be “calibrated, measured, and nimble” to ensure financial and economic stability. RBI retained both its inflation and growth forecast for the fiscal year despite softening of price pressures and multi-year high capacity utilisation as the future course remains “uncertain.”
“There are signs that consumer price inflation has peaked and it is expected to moderate going into the fourth quarter of this year,” RBI governor Shaktikanta Das said. “But inflation still remains at uncomfortably high levels. There are several uncertainties clouding the outlook. The resilient economic activity gives the space to act.”
The repo rate, at which the central bank lends to banks, was raised to 5.4% from 4.9%. All other rates, including the penal Marginal Standing Facility rate, move up by an identical margin. The six-member Monetary Policy Committee (MPC) voted unanimously to raise the rate.
Liquidity Will be in Focus
But external member JR Varma dissented on the stance focusing on withdrawal of accommodation.
An ET poll of economists and investors had pegged the rate increase at 50 basis points; half of them had expected a change in stance to neutral. A basis point is 0.01 percentage point.
“The MPC and the RBI have stayed cautious and did not over-interpret the recent commodity price moves,” said A Prasanna, head of research at
Primary Dealership Ltd. “With this increase, the MPC has significantly frontloaded the withdrawal of accommodation. This gives it the flexibility to slow down the pace of hikes going forward.”
The Sensex rose 0.15% to 58,387.93 points and the rupee gained 0.29% to close at 79.24 to the dollar. Benchmark bond yields rose 13 basis points to 7.29%. Bond yields and prices move in opposite directions.
Liquidity will be in focus as the central bank navigates a soaring current account deficit and an accelerating demand for loans, which are growing faster than bank deposits, straining the financial system.
Governor Das assured adequate liquidity-sufficient availability of funds in the market at rates indicated by the policy rate-despite this falling drastically in the past few months due to central bank intervention in the currency market to stabilise the rupee. When the RBI sells dollars, it sucks out rupees from the system.
“The RBI will remain vigilant on the liquidity front and conduct two-way, fine-tuning operations as and when warranted-both variable rate repo (VRR) and variable rate reverse repo (VRRR) operations of different tenors-depending on the evolving liquidity and financial conditions,” Das said.
The average surplus in the system fell to Rs 3.8 lakh crore in June-July from Rs 6.7 lakh crore in April-May.