The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on September 30, 2022 increased policy repo rate by 50 basis points (bps) to 5.9% making loans expensive.
The MPC also lowered the growth projection of FY23 from 7.2% to 7%.
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Growth for the second quarter has been projected at 6.3%, for third quarter 4.6%, for the fourth quarter 4.6% and 7.2% for the first quarter of the next financial year.
Inflation projection for FY has been retained at 6.7%. While the projection for second quarter is 7.1%, the projection for third quarter and fourth quarter is 6.5% and 5.8% respectively. For the first quarter of the next financial year, inflation has been projected at 5%.
Announcing the monetary policy RBI governor Shaktikanta Das while explaining the rationale behind the rate hike said the MPC was of the view that persistence of high inflation necessitates further calibrated withdrawal of monetary accommodation to restrain broadening of price pressures, anchor inflation expectations and contain the second- round effects.
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“This action will support medium-term growth prospects. Accordingly, the MPC decided to increase the policy repo rate by 50 basis points to 5.9% and to remain focused on withdrawal of accommodation, while supporting growth,” he said.
He said in the last two and half years, the world has witnessed two major shocks — the COVID-19 pandemic and the conflict in Ukraine.
These shocks have produced profound impact on the global economy. “As if that was not enough, now we are in the midst of a third major shock — a storm — arising from aggressive monetary policy actions and even more aggressive communication from Advanced Economy (AE) central banks,” he said.
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“The necessity of such actions is driven by their domestic considerations, but in a highly integrated global financial system, they inevitably cause negative externalities through global spillovers,” he added.
He said the recent sharp rate hikes and forward guidance about further big rate hikes have caused tightening of financial conditions, extreme volatility and risk aversion.
“All segments of the financial market including equity, bond and currency markets are in turmoil across countries. There is nervousness in financial markets with potential consequences for the real economy and financial stability. The global economy is in the eye of a new storm,” he said.
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Despite this unsettling global environment, Mr Das said the Indian economy continues to be resilient. “There is macroeconomic stability. The financial system remains intact, with improved performance parameters,” he said.
“The country has withstood the shocks from COVID-19 and the conflict in Ukraine. Our journey over the last two and half years, our steely resolve in dealing with the various challenges gives us the confidence to deal with the new storm that we are confronted with,” he added.