CUTTING INFLAT

Although the worst of inflation seems to be behind us, the inflation battle is not over yet. The MPC is likely to take a calibrated approach in its future reviews

As expected, the six-member monetary policy committee (MPC) - the interest rate-setting body of the Reserve Bank of India (RBI) - delivered a 35 basis points (bps) hike in the benchmark repurchase rate (repo) in its 7th December policy review.

The repo rate is the interest rate at which banks borrow from the RBI during times of tight liquidity in exchange for government securities as collateral. This way liquidity is injected into the system at the reporate. The repo rate influences all the other interest rates in the system like banks’ lending and borrowing rates. It also influences yields on government and corporate bonds.

Since inflation, as measured by the consumer price index (CPI), remains at high levels, the MPC has decided to remain focused on ‘withdrawal of accommodation’ to ensure inflation remains under the 6% threshold for the medium term. With this hike, the MPC has raised the repo rate by a cumulative 225 bps since April ’22 from 4% to 6.25% now.

While the increase in repo rate has slowed down to 35 bps in December review as compared to 50 bps undertaken in the last three policy reviews, there is a view that the MPC has been unnecessarily hawkish given the slide in inflation globally in recent weeks.

Is the MPC unnecessarily hawkish or is it doing a balancing act by ensuring that inflation remains fully grounded and the objective of sustained economic growth is met for the medium term?

HIGH CORE INFLATION - THE BIGGEST PROBLEM