India’s RBI hikes policy rate again, raises GDP growth forecast to 7%

MUMBAI (ICIS)–India’s central bank hiked its benchmark interest rate to 6.50% – sixth time it has done in the current fiscal year – and raised its GDP growth projection for the fiscal year ending March 2023 to 7% from 6.8%.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) raised its repo (repurchase) rate by 25 basis points (bps) to 6.50% while cutting its retail inflation forecast for the current fiscal year to 6.5% from the 6.7% it forecast in December 2022.

The repo rate is the rate at which the RBI lends money to commercial banks. The central bank has now raised the repo rate six times since its first unscheduled hike in May.

The RBI also projected India’s GDP growth at 6.4% for financial year 2023-24.

In the latest economic survey released on 31 January, the Indian finance ministry forecast GDP to grow between 6% and 6.8% in 2023-24.

“The global economic outlook doesn’t look as grim now as it did a few months ago. Growth prospects in major economies have improved while inflation is on a descent though inflation still remains well-above the target in major economies,” RBI Governor Shaktikanta Das said.

The RBI has forecast retail inflation for the January to March 2023 quarter to be around 5.7% while expecting core inflation to remain high.

The Consumer Price Index (CPI) based inflation or retail inflation, which RBI factors in while fixing its benchmark rate, stood at 5.72% in December 2022, which was the lowest recorded since January 2022.

In line with its price stability mandate, RBI has a target of keeping inflation at between 2%-6%.

The central bank has cut its retail inflation projection to 6.5% for 2022-23 from the 6.7% projected in its December report.

Inflation in financial year 2023-24 is projected at 5.3% with the first quarter (April-June) expected to see an inflation of 5%, second (July-September) and third (October-December) quarter inflation at 5.4% and fourth (January-March) quarter inflation at 5.6%.

“While inflation is expected to moderate in 2023-2024, it is likely to roll above the 4% target,” Das said.

Though the Indian economy remains resilient, the outlook is clouded by geopolitical tensions, volatility in oil prices and weak global demand and this economic environment could be a drag on domestic growth, Das added.

The RBI “will continue to maintain strong vigil on the evolving inflation outlook so as to ensure that it remains within the tolerance band and progressively aligns with the target”, he added.

Focus article by Priya Jestin