The Reserve Bank of India (RBI) increased its repo rate by 50 bps to 5.9% with immediate effect. Accordingly, the SDF and MSF rate were adjusted to 5.65% and 6.15%, respectively. Five out of six members of the MPC voted to increase the repo rate by 50 bps while one member voted to increase the repo rate by 35 bps. Similarly, five out of six members voted to remain focused on withdrawal of accommodation to ensure that inflation remains within the target while supporting growth.
According to the RBI, inflation is likely to be above the upper tolerance level of 6% through the first three quarters of FY23, with core inflation remaining high. The outlook is tense with considerable uncertainty, given the volatile geopolitical situation, global financial market volatility and supply disruptions. Meanwhile, domestic economic activity is holding up well and is expected to be buoyant in H2FY23, supported by festive season demand amid consumer and business optimism. The MPC is of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, restrain the broadening of price pressures and pre-empt second round effects. The RBI feels that the action will support medium-term growth prospects. Taking into account these factors and an average crude oil price (Indian basket) of US$100/barrel, inflation is projected at 6.7% in FY23, with Q2FY23 at 7.1%; Q3FY23 at 6.5%; and Q4FY23 at 5.8% and risks evenly balanced. CPI inflation for Q1FY24 is projected at 5.0%.
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