To keep inflationary expectations anchored, repo rate hiked: RBI's MPC

New Delhi, Dec 21 (IANS) The Reserve Bank of India (RBI) had raised the repo rate by 35 basis points on December 7, bringing the rate up to 6.25 per cent.

While taking the decision, the central bank's Monetary Policy Committee (MPC) had noted that the inflation trajectory going ahead would be shaped by both global and domestic factors.

According to minutes of the MPC released on Wednesday, it noted during its meeting held between December 5 to 7, that 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," it noted.

"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 committee noted.

The MPC noted in the meeting that 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, they added.

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, the MPC noted.

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 of 2022-23. It is likely to moderate in first half of 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," the panel said.

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," it said further.

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.