In line with expectations, the six-member financial policy committee (MPC) of the Reserve Bank of India (RBI) on Wednesday increased the policy bought or repo rate by 25 basis points (bps) to a four-year high of 6.5 per cent. The committee maintained its stance of withdrawal of lodging, though many believed that it would alter this to neutral.

With the current increase, the policy rate finished a cycle under RBI Governor Shaktikanta Das, as the repo rate was 6.5 per cent when he took charge in December 2018. In his first policy as MPC chair, the committee minimized the rate by 25 bps to 6.25 percent in February 2019. With the current hike, the central bank has now increased the rate by 250 bps since May 2022.

Though the quantum of boost was lower this time than previous hikes, the reserve bank refused to drop its guard against inflation, as there was no indicator that this might be the last increase, as many market individuals had anticipated. On the contrary, the tone of the policy was a little bit hawkish.

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the MPC was of the view that additional calibrated monetary policy action is warranted to keep inflation expectations anchored, break the perseverance of core inflation and consequently enhance medium-term growth prospects, Das said, while announcing the rate walking. 4 out of the 6 MPC members chose the 25 bps hike, while external members Ashima Goyal and Jayanth Varma voted versus it.

This is the most divided outcome in regards to voting of the current rate-setting committeee. Goyal and Varma also voted against keeping the stance of withdrawal of accommodation. While validating the position, Das stated, adjusted for inflation, the policy rate was still lower than pre-pandemic levels and that banks continued to have surplus liquidity. Liquidity remains in surplus, with an average daily absorption of Rs 1.6 trillion under the LAF (liquidity modification center) in January 2023.

The overall monetary conditions, for that reason, stay accommodative and, for this reason, the MPC decided to stay focused on withdrawal of accommodation, he said. The MPC projected consumer price index (CPI)-based inflation for financial year 2023-24 (FY24) at 5.3 per cent.

The inflation forecast for the current financial year was reduced somewhat to 6.5 percent from 6.7 per cent.

Genuine gdp (GDP) development for FY24 was projected at 6.4 per cent. The yield on the 10-year benchmark government paper increased by 3 bps as there was no indicator of a pause in rates of interest increases. As in test cricket, the key question is whether the RBI is now set to state the innings on its rate walking cycle, said Aurodeep Nandi, India economic expert at Nomura.

As such, the RBI governors communication struck a rather hawkish note, flagging issues on high core inflation, forecasting headline inflation at 5.3 percent for FY24, projecting self-confidence on growth, and flagging that monetary policy conditions are still not as tight as pre-pandemic levels-- which doesnt bolt the door totally on more tightening, Nandi stated. The MPC did not suggest when it would alter its stance, market participants think this would depend on the liquidity circumstance.

Our view is that the RBI will move to neutral stance in the April policy, stated Suyash Choudhary, head of set income at IDFC AMC. The genuine rate will progressively increase without further modification in small policy rates since predicted inflation continues to fall, Choudhary said, including that core liquidity would be close to neutral by early May. The rate walking will make loan rates dearer as around 40 percent of banks financing rates are linked to the repo rate.

The reserve bank anticipates banks to increase deposit rates, too, to satisfy credit need. The difference [between credit and deposit growth] has actually narrowed, but there is still a distinction, and it is really up to the banks to mobilise deposits and make up the space.

They are doing so through certificate of deposits and decreasing their non-SLR financial investments, however they require to mobilise deposits by themselves to fulfill the space, RBI Deputy Governor Michael Patra stated.