New Delhi, February 08, 2023.

The Reserve Bank of India hiked its key repo rate by 25 basis points (bps) on Wednesday as expected, saying core inflation remained high. The central bank said that its policy stance remains focused on the withdrawal of accommodation. In its December monetary policy review, the central bank had raised the key benchmark interest rate by 35 basis points (bps). Since May last year, the Reserve Bank has increased the short-term lending rate by 250 basis points, including today's, to contain inflation.

“On the back of a resilient economy and moderating inflation, the MPC increased the repo rate by 25 bps even as market participants had divergent expectations. The Indian economy remained resilient and grew on account of continued urban consumption, improving rural consumption, strong services growth, continued capacity utilisation in manufacturing, and a good Rabi sowing season. This is despite external headwinds due to continued geopolitical tensions and weaker external sector.

The MPC remained committed to targeting inflation while continuing with a stance of withdrawal of accommodation. RBI has committed to ensure liquidity to support estimated growth.  The MPC expects growth at 6.4% in FY23-24, higher than the average market expectations and inflation at 5.3%. Thus, a nominal GDP of 11.7%. This should make India one of the resilient economies next year as well. Surprisingly inflation projection is higher than the targeted benchmark every quarter of next fiscal.

The MPC estimates for Q4 FY24 growth stands at 5.8% and inflation at 5.6%. While it is largely expected that we are at the top of the rate increase cycle, the MPC is likely to monitor data both of external and domestic growth as well as inflation to determine further action. While it is likely that there could be a pause in the next policy, it is not clear at this stage that we are fully done with rate increases. Based on these estimates it certainly rules out any rate reduction in the last quarter of next fiscal unless data print comes out otherwise.”  Ms. Shanti Ekambaram, Whole-time Director, Kotak Mahindra Bank on RBI Monetary Policy.

"The policy is exactly what the doctor ordered and is in line with expectations. Core inflation remains sticky and larger global central banks continue to raise rates and hence the RBI stance as well as the interest rate move may help break core inflation persistence and that in turn will strengthen the medium-term growth prospects of the Indian economy. The RBI raised FY23 growth projections by 20 bps to 7% and projected a growth of 6.4% for FY24 subject to a normal monsoon and crude price average of $ 95/bbl. Importantly, the RBI projects a much stronger growth in H1 FY24, averaging 7%. While the RBI is likely to remain on a pause now, we don’t expect any rate cuts in calendar 2023. The RBI will also need to remain vigilant of the spill over effects via INR given the weak external account and an accident-prone global economy. FPI selling continued in Jan 23 with a net outflow of $3 bn, said Dr. Sachchidanand Shukla, Chief Economist - Mahindra Group.