RBI Monetary Policy Highlights June 2022: Repo Rate hiked by 50bps to 4.90 percent, GDP growth retained at 7.2% for FY 23

RBI Monetary Policy Repo Rate: RBI Monetary Policy Highlights June 2022: The Reserve Bank of India's Monetary Policy Committee has voted unanimously to increase the policy repo rate by 50 bps to 4.90 percent. The standing deposit facility (SDF rate) also stands adjusted to 4.65% and the marginal standing facility (MSF rate) and bank rate to 5.15%.

The MPC has retained India's GDP growth forecast for FY23 at 7.2 percent, with risks evenly balanced. India's GDP growth has been estimated at 8.7 percent 2021-22, as per provisional estimates released by the National Statistical Office on May 31st. India's real GDP in 2021-22 has exceeded the pre-pandemic level that is FY 2019-20, as per RBI Governor Shaktikanta Das.

Consequently, the standing deposit facility - the SDF rate - stands adjusted to 4.65% and the marginal standing facility - MSF rate and bank rate - to 5.15%: RBI Governor Shaktikanta Das pic.twitter.com/ddpxY6tqso

— ANI (@ANI) June 8, 2022

The inflation is projected at 6.7 percent in FY 2022-23, as per RBI Governor Shaktikanta Das.

READ ALSO: RBI Monetary Policy Highlights: Repo rates remain unchanged at 4%, GDP growth projected at 7.2% for FY 23

RBI Monetary Policy Meeting: Key Decisions 

The Monetary Policy Committee (MPC) took the following decisions after its three-day consultations- 

-Policy repo rate hike under the liquidity adjustment facility (LAF) by 50 basis points to 4.90 per cent with immediate effect.

-Standing deposit facility (SDF) rate stands adjusted to 4.65 per cent 

-Marginal standing facility (MSF) rate and Bank Rate stands adjusted to 5.15 per cent

These decisions have been taken to achieve the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

According to the provisional estimates released by the National Statistical Office on May 31st, India's GDP growth ins 2021-22 is estimated at 8.7%. This level of real GDP in 2021-22 has exceeded the pre-pandemic, i.e., 2019-20 level: RBI Governor Shaktikanta Das pic.twitter.com/RauxMmsu04

— ANI (@ANI) June 8, 2022

Global Economic Assessment 

RBI governor stated that since MPC’s meeting in May 2022, the global economy continues to grapple with multi-decadal high inflation and slowing growth amid persisting geopolitical tensions and sanctions and high crude oil prices. The global financial markets have been hit by turbulence amidst growing stagflation concerns, leading to a tightening of global financial conditions and risks to the growth outlook and financial stability.

Domestic Economic Assessment

India's real GDP growth is projected at 8.7 percent in FY 2021-22 as per provisional estimates of National Statistical Office (NSO), which is 1.5 per cent above the pre-pandemic level (2019-20). The real GDP growth in Q4:2021-22 decelerated to 4.1 per cent from 5.4 per cent in Q3 mainly due to weakness in private consumption during third wave of COVID-19. 

The current data of April-May 2022 indicates broadening of recovery in economic activity. The urban and rural demand looks to gradually improving and recovering.

The merchandise exports recorded double-digit growth for 15th month in a row during May. The non-oil and non-gold imports also continued to expand at a healthy pace. India’s foreign exchange reserves were recorded at US$ 601.4 billion as on May 27, 2022. 

Inflation

• The CPI headline inflation was recorded to have risen from 7.0 per cent in March 2022 to 7.8 per cent in April 2022.
• The food inflation pressures also increased led by increase in prices of milk, cereals, fruits, vegetables, spices and prepared meals. 
• The fuel inflation also saw a hike, driven by a rise in LPG and kerosene prices. 
• The core inflation (CPI excluding food and fuel) hardened across almost all components.

Economic Outlook

• The current domestic inflation outlook has been adjudged as uncertain due to tense global geopolitical situation and the consequent elevated commodity prices.
• The restrictions on wheat exports is expected to improve the domestic supplies but a shortfall in the rabi production due to intense heat wave could be an offsetting risk, as per the MPC. 
• The normal south-west monsoon forecast is good news for the kharif agricultural production and the food price outlook. 
• The edible oil prices continue to remain under pressure amid adverse global supply conditions.
• The International crude oil prices, however, remain elevated. There are risks from revisions in the prices of electricity. 
• Taking into consideration all these factors, the inflation is now projected at 6.7 per cent in 2022-23 with Q1 at 7.5 per cent; Q2 at 7.4 per cent; Q3 at 6.2 per cent; and Q4 at 5.8 per cent, with risks evenly balanced.

Domestic economic Recovery

There has been a gradual recovery in domestic economic activity and rural consumption is expected to benefit from the projected normal south-west monsoon and improvement in agricultural prospects. 

A rebound in contact-intensive services is also likely to boost urban consumption. Investment activity is also expected to be supported by improving capacity utilisation, government’s capex push and strengthening of bank credit. 

There are though expected to be continued supply chain bottlenecks due to the current geopolitical situation and tightening of financial conditions.

Taking all these factors into consideration, MPC has retained real GDP growth projection for 2022-23 at 7.2 per cent with Q1 at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4.0 per cent, with risks broadly balanced.