RBI Policy| MPC raises the repo rate by 35 basis points but won't relax the inflation guard

 The MPC has increased the repo rate by more than two percentage points in the past six months with this rate increase.

The RBI, under the direction of Governor Shaktikanta Das, has been proactive in adjusting the price and volume of the currency in the economy.

In its final meeting of 2022 on December 7, the Reserve Bank of India's monetary policy committee (MPC) increased the benchmark repo rate by 35 basis points (bps), to 6.25%, to continue the fight against inflation.The rate at which the central bank lends short-term funds to banks is known as the repo rate. One tenth of a percentage point is referred to as a basis point.

To combat inflation, the MPC has been raising policy rates steadily this year, by about two percentage points. For almost the whole year, retail inflation has been above the central bank's tolerance level.

The MPC is mandated by law to maintain inflation within the range of 2 to 6 percent. The panel convened in early November to compose a letter outlining its inability to fulfil that objective as well as the steps it intended to take to lower pricing. Since the MPC was established in 2016, this is the first time that such a letter has been required.

Inflation is too high.

The stubbornly high inflation that has remained above the central bank's target for 10 straight months was a factor in the MPC's decision to raise rates.With a favourable foundation, India's headline retail inflation rate decreased to a three-month low of 6.77 percent in October from a previous high of 7.41 percent, albeit it remained over the central bank's upper tolerance zone of 6 percent.The MPC continued to emphasise the removal of the accommodating approach. An accommodating approach shows that the trend is primarily in favour of lowering interest rates.

With this most recent increase, the repo rate has increased by 225 basis points throughout this rate-hike cycle.There have been requests for a rate pause within the MPC. The meeting's minutes from September show that member Jayanth Varma requested a break following roughly two percentage point rate increases in only four months.According to Varma, excessive rate tightening would impede the economy's fledgling recovery. In a situation where the growth forecast is extremely precarious, pushing the policy rate substantially above the neutral rate is risky, according to Varma.

Concerns exist regarding expansion. India's second-quarter GDP decreased by more than half to 6.3 percent from the base period's 13.5 percent effect vanished. India still hasn't regained the desired growth momentum.

However, unemployment is also increasing. According to CMIE, the unemployment rate increased to 8% in November, showing that the rate of joblessness is speeding up.In contrast to 6.43 percent in September, the jobless rate was 7.77 percent in October. The rural economy is suffering due to high unemployment and inflation, which is affecting consumption.According to Nielsen IQ's FMCG Snapshot for Q3 of 2022 published in November, rural volumes fell by 3.6 percent in the third quarter of the year, more than double the 2.4 percent decline experienced in the April to June period due to inflation and unseasonal rains.