RBI Monetary Policy – What are the key takeaways

RBI announced the October 2022 monetary policy on 30th September, hiking the repo rates by another 50 basis points, along expected lines. Just look at the string of repo rates hikes done by the RBI. It hiked repo rates by 40 bps in May, 50 bps in June, 50 bps in August and now another 50 bps in September 2022. That makes it a full 190 basis points repo rate  hike in just 4 months, taking the rates from 4% to 5.9%. Of course, this does sound steep, but it is nowhere close to the Fed hiking by 75 bps thrice in succession.

Compared to the unabashedly hawkish language that the Fed had adopted in the policy the RBI is a lot more measured. However, in this policy, the RBI governor has clearly stated that the RBI would continue to hike rates till inflation and inflation expectations came down sharply. That is perhaps the first indication that the terminal repo rates of the RBI may now shift from 6% to 6.5% or even higher, with large parts front loaded in 2022 itself. Unlike the US, UK and the EU, growth has not been such a major challenge for the Indian economy.

Highlights of the RBI monetary policy announcement 

The RBI has stayed hawkish on rates, optimistic on inflation and cautious on growth. Here is a gist of what the RBI announced in its monetary policy.

    • RBI hiked the repo rates by 50 basis points from 5.40% to 5.90%. Rates are now 75 bps above the pre-COVID repo rate levels of 5.15%, although, the rates are still much lower in real terms if inflation is also factored in. One key signal was that the RBI would conclude the rate hikes at 6.5% or higher rather than at 6% as originally anticipated.

    • This has had an impact on the derived rates. For instance, the standing deposit facility (SDF), which his pegged 25 basis points below the repo rate, stands increased to 5.65%, indicating that liquidity tightening could also happen going ahead.

    • The other pegged rate is the bank rate and the marginal standing facility (MSF) rate. These are pegged 25 basis points above the repo rates at 6.15%. This rate impacts borrowing costs and hints at higher EMIs on loans. 

    • In terms of macro expectations, the RBI has maintained its inflation forecast at 6.7%, despite the CPI inflation in August going up to 7%. That could be more due to bets that a better Kharif and Rabi would tone down food inflation. At the same time, the RBI has lowered the real GDP growth for FY23 from 7.2% to 7.0%, due to global macro headwinds, including distinct fears of a global recession.

    • As usual, there was unanimity in the rate hike decision but not in the stance. In fact, all 6 members of the MPC voted unanimously to hike repo rates by 50 basis points to 5.90%. However, on the subject of withdrawal of accommodation without impacting growth, only 5 out 6 voted in favour. Like last time, Jayanth Varma was of the view that the RBI should purely focus on controlling inflation and not digress worrying about growth.

Why was RBI optimistic on inflation but cautious on growth? 

The RBI cut the real GDP growth for FY23 by 20 basis points to 7%. That is not surprising considering that too much global hawkishness had almost pushed the global economies into recession. US has already contracted for 2 quarters in succession. However, it may be rathe surprising that 20 bps may appear to be a very small downgrade. There are several reasons. Firstly, the RBI believes that the government thrust on capex should boost the supply side. In addition, the revival in rural demand and the sharp growth in services sector combined with festive season urban demand should hold growth. Growth is not a big challenge.

Even as CPI inflation bounced back to 7% in August, the RBI opted to keep its inflation forecast for FY23 static at 6.7%. There are several reasons for the RBI optimism on the inflation front. Firstly, WPI inflation has tapered sharply. Secondly, the RBI is confident that the lag effect of lower commodity prices would eventually rub off. The late recovery in Kharif output and strong prospects for Rabi should eventually soften food prices. RBI is factoring crude of $100/bbl for its estimates, which is well above the current price, so there is enough leg room available. RBI has reasons to be optimistic on inflation.

To cut a long story short, RBI has stated that it would stay hawkish till inflation came under control. has retained its hawkish undertone till inflation expectations are under control. That points to a terminal repo rate of 6.5% or higher, with a great deal of front loading in 2022. The December meeting could hold a lot more actionable cues from the RBI.