RBI hikes rates by just 25 bps as inflation moderates

In the first Monetary Policy announcement for 2023, the RBI on February 08, restricted itself to just a 25 bps rate hike. This comes after a 35 bps rate hike in December and 4 hikes of 50 bps prior to that. This hike takes the repo rate to 6.5%; a full 250 basis points higher since the rate hikes by the RBI started in May 2022. However, the rate decision was split at 4:2.

An important announcement in the RBI policy at the conclusion of the 3-day meeting of the Monetary Policy Committee (MPC) was to withdraw the accommodative stance of the policy in entirety. 

As the RBI governor said, the situation did not look so grim now, as it did before. The minutes of the MPC meeting would be published exactly 14 days after the MPC policy announcement i.e. on 22nd February 2023.

For the full fiscal year FY23 RBI has hiked its GDP forecast by 20 bps from 6.8% to 7.0% in line with the first advance estimates of GDP put out by MOSPI. The GDP growth rate for FY24 has bene pegged slightly lower at 6.4%. 

However, the RBI has not tinkered with the inflation assessment for FY23 and maintained it at 6.5%. That is largely because, although fuel and food inflation have been on a downward trend, the core inflation continues to be elevated.

The RBI monetary policy guides the bank and lending rates in the economy. If the repo rate is hiked, it is generally followed by a rise in deposit as well as loan interest rates. 

In the last few months, the RBI has hiked rates by 250 basis points. While the lending rates have moved in tandem due to seamless transmission, the deposit rates have not kept pace. This slack has resulted in bumper profits announced by banks in the last two quarters.