Monetary Policy Statement, 2022-23
Resolution of the Monetary Policy Committee (MPC) December 5-7, 2022
·
Increase the policy repo rate under the liquidity
adjustment facility (LAF) by 35 basis points to 6.25 per cent with immediate effect.
·
The MPC also decided to remain focused on
withdrawal of accommodation to ensure that inflation remains within the target
going forward, while supporting growth.
[RBI Press Release:
2022-2023/1320 dated 7 December 2022]
On the basis of an assessment of the current and evolving macroeconomic
situation, the Monetary Policy Committee (MPC) at its meeting on December 7,
2022 decided to:
·
Increase the
policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points
to 6.25 per cent with immediate effect.
Consequently, the standing deposit facility (SDF) rate stands adjusted
to 6.00 per cent and the marginal standing facility (MSF) rate and the Bank
Rate to 6.50 per cent.
·
The MPC also
decided to remain focused on withdrawal of accommodation to ensure that
inflation remains within the target going forward, while supporting growth.
These decisions are in consonance with the objective of achieving the
medium-term target for consumer price index (CPI) inflation of 4 per cent
within a band of +/- 2 per cent, while supporting growth.
The main considerations underlying the decision are set out in the
statement below.
Assessment
Global Economy
2. The global economic outlook is skewed to the downside. Global growth
is set to lose momentum as monetary policy actions tighten financial conditions
and as consumer confidence weakens with the rising cost of livelihood.
Inflation remains elevated and persistent across countries as they grapple with
food and energy price shocks and shortages. More recently, however, there are
some signs of moderation in price pressures, which have raised expectations of
an easing in the pace of monetary tightening. Alongside easing in sovereign
bond yields, the US dollar has come off its highs. Capital flows to emerging
market economies (EMEs) remain volatile and global spillovers
pose risks to growth prospects.
Domestic Economy
3. On the domestic front, real gross domestic product (GDP) increased by
6.3 per cent year-on-year (y-o-y) in Q2:2022-23 after an increase of 13.5 per
cent in Q1. On the supply side, gross value added (GVA) rose by 5.6 per cent in
Q2.
4. In Q3, economic activity is exhibiting resilience. In the
agricultural sector, a pick-up in rabi sowing (6.4 per cent higher than a year
ago on December 2) is supported by the good progress of the north-east monsoon
and above average reservoir levels. Activity in the industry and services
sectors is in expansion mode, as reflected in purchasing managers’ indices
(PMIs) and other high frequency indicators.
5. Aggregate demand conditions have been supported by pent-up spending
and discretionary expenditures during the festival season, although their
evolution is somewhat uneven across sectors. Urban demand has remained buoyant,
and rural demand is recovering. Investment activity is in modest expansion.
Merchandise exports contracted in October after an expansion for 19 consecutive
months. Growth in non-oil non-gold imports decelerated.
6. CPI inflation moderated to 6.8 per cent (y-o-y) in October 2022 from
7.4 per cent in September, with favourable base effects mitigating the impact
of pick-up in price momentum in October. Food inflation softened, aided by
easing inflation in vegetables and edible oils, despite sustained pressures from
prices of cereals, milk and spices. Fuel inflation registered some easing in
October, driven by softening of price inflation in LPG, kerosene (PDS) and
firewood and chips. Core CPI (i.e., CPI excluding food and fuel) inflation
persisted at elevated levels at 6 per cent, with price pressures across most of
its constituent sub-groups.
7. The overall liquidity remains in surplus, with average daily
absorption under the liquidity adjustment facility (LAF) at ₹1.4 lakh
crore during October-November as compared with ₹2.2 lakh crore in
August-September. On a y-o-y basis, money supply (M3) expanded by 8.9 per cent
as on November 18, 2022 while bank credit rose by 17.2 per cent. India’s
foreign exchange reserves were placed at US$ 561.2 billion as on December 2, 2022.
Outlook
8. The inflation trajectory going ahead would be shaped by both global
and domestic factors. In case of food, while vegetable prices are likely to see
seasonal winter correction, prices of cereals and spices may stay elevated in
the near-term on supply concerns. High feed costs could also keep inflation
elevated in respect of milk. Adverse climate events – both domestic and global
– are increasingly becoming a significant source of upside risk to food prices.
Global demand is weakening. Unabating geopolitical tensions continue to impart
uncertainty to the food and energy prices outlook. The correction in industrial
input prices and supply chain pressures, if sustained, could help ease
pressures on output prices; but the pending pass-through of input costs could
keep core inflation firm. Imported inflation risks from the US dollar movements
need to be watched closely. Taking into account these factors and assuming an
average crude oil price (Indian basket) of US$ 100 per barrel, inflation is
projected at 6.7 per cent in 2022-23, with Q3 at 6.6 per cent and Q4 at 5.9 per
cent, and risks evenly balanced. CPI inflation for Q1:2023-24 is projected at
5.0 per cent and for Q2 at 5.4 per cent, on the assumption of a normal monsoon.
9. On growth, the agricultural outlook has brightened, with the
prospects of a good rabi harvest. The sustained rebound in contact-intensive
sectors is supporting urban consumption. Robust and broad-based credit growth
and government’s thrust on capital spending and infrastructure should bolster
investment activity. According to the RBI’s survey, consumer confidence is
improving. The economy, however, faces accentuated headwinds from protracted
geopolitical tensions, tightening global financial conditions and slowing
external demand. Taking all these factors into consideration, the real GDP
growth for 2022-23 is projected at 6.8 per cent with Q3 at 4.4 per cent and Q4
at 4.2 per cent, with risks evenly balanced. Real GDP growth is projected at
7.1 per cent for Q1:2023-24 and at 5.9 per cent for Q2
10. Inflation has ruled at or above the upper tolerance band since
January 2022 and core inflation is persisting around 6 per cent. Headline
inflation is expected to remain above or close to the upper threshold in Q3 and
Q4:2022-23. It is likely to moderate in H1:2023-24 but will still remain well
above the target. Meanwhile, economic activity has held up well and is expected
to be resilient, supported by domestic demand. Net exports would remain subdued
due to the drag from evolving external demand conditions. Further, the impact
of monetary policy measures undertaken needs to be watched. On balance, the MPC
is of the view that, further calibrated monetary policy action is warranted to
keep inflation expectations anchored, break the core inflation persistence and
contain second round effects, so as to strengthen medium-term growth prospects.
Accordingly, the MPC decided to increase the policy repo rate by 35 basis
points to 6.25 per cent. The MPC also decided to remain focused on withdrawal
of accommodation to ensure that inflation remains within the target going
forward, while supporting growth.
11. Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta
Das voted to increase the policy repo rate by 35 basis points. Prof. Jayanth R.
Varma voted against the repo rate hike.
12. Dr. Shashanka Bhide, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and
Shri Shaktikanta Das voted to remain focused on
withdrawal of accommodation to ensure that inflation remains within the target
going forward, while supporting growth. Dr. Ashima
Goyal and Prof. Jayanth R. Varma voted against this part of the resolution.
13. The minutes of the MPC’s meeting will be published on December 21,
2022.
14. The next meeting of the MPC is scheduled during February 6-8, 2023.