The Reserve Bank of India (RBI) has moved along expected lines, raising the repo rate by 35 basis points, lowering the growth expectation and maintaining its 6.7% inflation forecast for the current fiscal year ending March.

 The rate hike has moderated with inflation cooling somewhat, but the central bank has said that the battle against price rise is not over yet. In the last three monetary policies, the RBI had raised the repo rate by 50 basis points.

With the new hike, the Reserve Bank has taken the repo rate to 6.25%. This is an increase by 190 basis points since its first unscheduled hike in May amid rising inflationary headwinds.

There is no signal from the RBI Governor Shaktikanta Das that the rate hike cycle is coming to an end. The   market is expecting at least another rate hike before a possible pause. There is uncertainty over inflation and global headwinds will remain with the war in Ukraine nowhere reaching its end.

Said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, " We continue to expect the focus of MPC (monetary policy committee) to remain in a watchful mode as uncertainties on inflation settle down. We see a possibility of another 25 bps rate hike before a prolonged pause."

That there will be more rate hikes was echoed by Abheek Barua, chief economist at HDFC Bank. “Bottom line is the policy announcement today signalled that more rate hikes are in the offing. We expect the terminal rate to be close 6.5-6.75%,” he said.

The standing deposit facility rate and the marginal standing facility rate were also increased by the same quantum to 6.00%and 6.50%, respectively.

The six-member MPC headed by the RBI Governor started deliberations on the bi-monthly policy review on 5 December.

Inflation battle still on

The RBI Governor expects inflation to remain sticky and elevated, despite some signs of moderation. "The MPC was of the view that further calibrated monetary policy action was warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects," Das said while unveiling the monetary policy on Wednesday.

GDP lowered to 6.8%

The RBI lowered its real FY23 GDP forecast to 6.8% from 7%.

Das said the Indian economy remained resilient and would be fastest growing in Asia this year. “Indian corporates are healthier than before.  Indian economy remains resilient. Our inflation remains elevated as in most part of the world," he said.

“Ukraine war has fundamentally changed the world economic outlook. Emerging countries have been among the worst affected," the RBI chief added.

Liquidity to improve

The RBI is ready to conduct LAF operations to infuse liquidity into the system. “Liquidity conditions are set to improve. Weighted average lending rate is up 117 bps in May-October," Das said.

According to Barua, there were signs in the governor’s statement that suggested that tightness in financial conditions could intensify going forward. “While the RBI re-iterated that it would continue to manage liquidity conditions through fine-tunning operations, it cautioned markets to wean themselves off the surplus liquidity overhang and not take it for granted,” he said.