RBI raises repo rate by 50 basis points to 5.90%

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The Reserve Bank of India raised its repo rate by 50 basis points to 5.90% on September 30 to tame the continued strong inflation.

This is the fourth consecutive increase in the repo rate.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth, the central bank said in a statement.

High and protracted uncertainty surrounding the course of geopolitical conditions weighs heavily on the inflation outlook, the bank said in its monetary policy statement.

Commodity prices, however, have softened and recession risks in advanced economies (AEs) are rising. On the domestic front, the late recovery in sowing augurs well for kharif output. The prospects for the rabi crop are buffered by comfortable reservoir levels. The risk of crop damage from excessive/unseasonal rains, however, remains.

The central bank said inflation is projected at 6.7% in 2022-23, with Q2 at 7.1%; Q3 at 6.5%; and Q4 at 5.8%, and risks are evenly balanced. CPI inflation for Q1:2023-24 is projected at 5%.

On growth, the improving outlook for agriculture and allied activities and rebound in services are boosting the prospects for aggregate supply. The Government’s continued thrust on capex, improvement in capacity utilisation in manufacturing and pick-up in non-food credit should sustain the expansion in industrial activity that stalled in July.

According to the RBI’s surveys, consumer outlook remains stable and firms in manufacturing, services and infrastructure sectors are optimistic about demand conditions and sales prospects.

On the other hand, headwinds from geopolitical tensions, tightening global financial conditions and the slowing external demand pose downside risks to net exports and hence to India’s GDP outlook.

Taking all these factors into consideration, real GDP growth for 2022-23 is projected at 7% with Q2 at 6.3%; Q3 at 4.6%; and Q4 at 4.6%, and risks broadly balanced. For Q1:2023-24, it is projected at 7.2%.