RBI soft-pedals on rate hikes, but may not have hit the brakes yet

The worst of inflation is behind us, economy is resilient but global slowdown could dent growth hopes to 6.8% from 7% projected earlier, says Governor Shaktikanta Das

The Reserve Bank of India (RBI) on Wednesday raised the policy repo rate by 35 basis points (bps) to 6.25%, downshifting gears from consecutive increases of 50 bps, and scaled down GDP growth hopes for the year to 6.8% from 7%, even as Governor Shaktikanta Das exuded confidence about the economy being resilient and asserted that “the worst of inflation” was behind us.

A 100 basis points equal one percentage point. The central bank retained its inflation projection for 2022-23 at 6.7%, noting that inflation will ease but stay well above the 6% upper tolerance limit set for the RBI.

Mr. Das vowed to keep an “Arjuna’s eye” on evolving inflation dynamics, even as cooling global prices for crude oil, commodities and other items extend hope of relief.

Having hovered well over RBI’s upper tolerance limit of 6% since January 2022, retail inflation eased slightly on a sequential basis to 6.8% in October, but Mr. Das noted that core inflation remains sticky and the medium-term outlook “is exposed to heightened uncertainties from geopolitical tensions, financial market volatility and the rising incidence of weather-related disruptions”.

RBI Deputy Governor Michael Patra said the moderation of inflation will be “very grudging, very uneven” so the central bank must first “shepherd inflation firmly into the tolerance band (below 6%) and then to the 4% target”.

The RBI now expects inflation to average 5.9% in the January to March 2023 quarter, drop to 5% in the first quarter (Q1) of 2023-24 and edge up to 5.4% between July and September 2023, assuming a normal monsoon.

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