<p>The decision of the RBI’s Monetary Policy Committee to raise the repo rate by 50 basis points was in line with expectations. It marked a continuation of the monetary policy that it has adopted in the past few months to get a grip on inflation. Inflation has continuously risen, affecting personal and family budgets, and is now threatening to hit government finances and budgetary planning, and corporate plans and performance.</p>.<p>The decision is also in accordance with the policy to withdraw the accommodative stance of the past and to prioritise inflation over growth. The repo rate, the rate at which the RBI lends to banks, has been hiked to 5.40 per cent from the earlier 4.90 per cent. The benchmark policy rate is now at the highest since August 2019, up by 1.4 per cent since May. </p>.<p>Financial markets were largely expecting a 35-50 basis points hike and so it did not cause any serious reaction on one side or the other. There is a vague sense that the inflation rate has peaked, but it is still stubbornly above 7 per cent. RBI Governor Shaktikanta Das projected an inflation rate of 6.7 per cent and a GDP growth of 7.2 per cent for 2022-23. The Consumer Price Index inflation is seen at 7.1 per cent in the second quarter, 6.4 per cent in the third and 5.8 per cent in the last quarter, averaging 6.7 per cent. This is much above the RBI’s tolerance level. The MPC said that food and metal prices have come off their peaks recently but noted that the “spill-overs from geopolitical shocks are imparting considerable uncertainty to the inflation trajectory”. Crude prices still remain elevated and volatile though they have declined in recent weeks. There are supply concerns and the global demand outlook is weakening. The appreciation of the US dollar, which may yet continue, will work to import inflation. </p>.<p>All these factors can also aggravate. The expectation that the food prices may ease depends much on the farm output. The behaviour of the monsoon is not favourable in some parts of the country. Wheat output has declined and rice prices have increased. Geopolitical tensions can get worse and there are projections of a fall in world economic growth. Growth in India will also be affected, and the higher rates will themselves constrain economic activities. Das noted that India will be among the more resilient economies of the world in 2022-23, but he also admitted that the economy has been impacted by the global situation. The RBI action will take time to work through the economy. If the central bank had started its monetary action earlier than it did, the situation would have been better now. </p>
<p>The decision of the RBI’s Monetary Policy Committee to raise the repo rate by 50 basis points was in line with expectations. It marked a continuation of the monetary policy that it has adopted in the past few months to get a grip on inflation. Inflation has continuously risen, affecting personal and family budgets, and is now threatening to hit government finances and budgetary planning, and corporate plans and performance.</p>.<p>The decision is also in accordance with the policy to withdraw the accommodative stance of the past and to prioritise inflation over growth. The repo rate, the rate at which the RBI lends to banks, has been hiked to 5.40 per cent from the earlier 4.90 per cent. The benchmark policy rate is now at the highest since August 2019, up by 1.4 per cent since May. </p>.<p>Financial markets were largely expecting a 35-50 basis points hike and so it did not cause any serious reaction on one side or the other. There is a vague sense that the inflation rate has peaked, but it is still stubbornly above 7 per cent. RBI Governor Shaktikanta Das projected an inflation rate of 6.7 per cent and a GDP growth of 7.2 per cent for 2022-23. The Consumer Price Index inflation is seen at 7.1 per cent in the second quarter, 6.4 per cent in the third and 5.8 per cent in the last quarter, averaging 6.7 per cent. This is much above the RBI’s tolerance level. The MPC said that food and metal prices have come off their peaks recently but noted that the “spill-overs from geopolitical shocks are imparting considerable uncertainty to the inflation trajectory”. Crude prices still remain elevated and volatile though they have declined in recent weeks. There are supply concerns and the global demand outlook is weakening. The appreciation of the US dollar, which may yet continue, will work to import inflation. </p>.<p>All these factors can also aggravate. The expectation that the food prices may ease depends much on the farm output. The behaviour of the monsoon is not favourable in some parts of the country. Wheat output has declined and rice prices have increased. Geopolitical tensions can get worse and there are projections of a fall in world economic growth. Growth in India will also be affected, and the higher rates will themselves constrain economic activities. Das noted that India will be among the more resilient economies of the world in 2022-23, but he also admitted that the economy has been impacted by the global situation. The RBI action will take time to work through the economy. If the central bank had started its monetary action earlier than it did, the situation would have been better now. </p>
