The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday raised the policy repo rate – the rate at which the RBI lends to commercial banks -- by 50 basis points (bps) to 5.9%. RBI Governor Shaktikanta Das cited the ‘persistence of high inflation that necessitated the withdrawal of monetary accommodation to restrain broadening of price pressures and contain second round effects’. “This action will support medium-term growth prospects,” Mr. Das added. The committee also voted by a 5:1 majority to “remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward”. Announcing the policy, he said, “We are in the midst of... a storm arising from aggressive monetary policy actions and even more aggressive communication from advanced economy central banks.” Noting that these actions had caused tightening of financial conditions, extreme volatility and risk aversion, he asserted: “Despite this unsettling global environment, the Indian economy continues to be resilient; there is macroeconomic stability.” However, given headwinds from extended geopolitical tensions, tightening global financial conditions and a possible decline in external demand, Mr. Das said the RBI projected economic growth in FY23 at 7% (down from the 7.2% it had forecast earlier). The MPC, however, retained the retail inflation projection for the current fiscal year at 6.7%. According to agency reports, he said the central bank considers the communication to the government for missing inflation targets as privileged communication and will not be making it public. As per the medium-term inflation targeting framework, the RBI has to write a letter explaining the reasons for missing the target and charting out details on when it is likely to achieve the target of 4%.
At his press conference, asked to comment on economist Nouriel Roubini’s prediction that the U.S. and the global economy would likely enter a ‘long and ugly recession’ towards the end of this year, Mr. Das said, “So far as India is concerned, our buffers are very strong and our focus is always on maintaining financial stability and macroeconomic stability.” He added that the RBI’s uppermost objective was to “maintain price and financial stability.” Mr. Das said amid the global currency market turmoil, the Indian rupee had been depreciating in an orderly manner. “Our focus is on prudent intervention in the forex market and prudent management of the foreign exchange reserves.” Stating that India’s foreign exchange reserves at $537.5 billion as on September 23 compared favourably with most peer economies, he said the ‘umbrella’ of forex reserves continued to remain strong. The benchmark S&P BSE Sensex rode on gains in financial stocks to climb 1.8% to 57,426.92 points on Friday. The rupee gained versus the dollar to close at 81.40. With the world battling two major shocks – COVID-19 and the Ukraine conflict – the signals from the RBI on the economy makes it an important story
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