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

With the latest 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 very first policy as MPC chair, the committee decreased the rate by 25 bps to 6.25 per cent in February 2019. With the latest hike, the central bank has actually now increased the rate by 250 bps since May 2022.

The quantum of increase was lower this time than previous hikes, the main bank declined to drop its guard versus inflation, as there was no sign that this could be the last boost, as most market participants 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 financial policy action is called for to keep inflation expectations anchored, break the persistence of core inflation and therefore enhance medium-term growth prospects, Das said, while announcing the rate hike. 4 out of the six MPC members chose the 25 bps trek, while external members Ashima Goyal and Jayanth Varma voted against it.

This is the most divided outcome in terms of voting of the current rate-setting committeee. Goyal and Varma likewise voted versus keeping the stance of withdrawal of accommodation. While validating the stance, Das said, changed for inflation, the policy rate was still lower than pre-pandemic levels which banks continued to have surplus liquidity. Liquidity remains in surplus, with a typical everyday absorption of Rs 1.6 trillion under the LAF (liquidity modification facility) in January 2023.

The total monetary conditions, for that reason, stay accommodative and, thus, the MPC chose to stay focused on withdrawal of lodging, he said. The MPC forecasted consumer rate index (CPI)-based inflation for financial year 2023-24 (FY24) at 5.3 percent.

The inflation projection for the existing financial year was lowered slightly to 6.5 per cent from 6.7 percent.

Real gdp (GDP) growth for FY24 was predicted at 6.4 percent. The yield on the 10-year benchmark federal government paper rose by 3 bps as there was no indicator of a time out in rates of interest boosts. As in test cricket, the essential concern is whether the RBI is now set to declare the innings on its rate hike cycle, said Aurodeep Nandi, India economic expert at Nomura.

As such, the RBI governors interaction struck a somewhat hawkish note, flagging concerns on high core inflation, forecasting headline inflation at 5.3 percent for FY24, forecasting confidence on growth, and flagging that monetary policy conditions are still not as tight as pre-pandemic levels-- which doesnt bolt the door completely on more tightening up, Nandi stated. Though the MPC did not show when it would alter its position, market participants think this would depend upon the liquidity circumstance.

Our view is that the RBI will move to neutral position in the April policy, stated Suyash Choudhary, head of set earnings at IDFC AMC. The genuine rate will gradually increase without additional change in nominal policy rates because predicted inflation continues to fall, Choudhary stated, adding that core liquidity would be close to neutral by early May. The rate hike will make loan rates dearer as around 40 percent of banks financing rates are linked to the repo rate.

The central bank expects banks to increase deposit rates, too, to meet credit demand. The distinction [in between credit and deposit development] has actually narrowed, but there is still a distinction, and it is truly approximately the banks to mobilise deposits and comprise the gap.

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