RBI lifts loan costs to tame inflation

RBI Governor Shaktikanta Das. File
| Photo Credit: PTI

The Monetary Policy Committee (MPC) of the Reserve Bank of India on Wednesday raised the benchmark lending rate by 25 basis points (bps) to 6.5% as the RBI targets persistently high core or underlying inflation that it sees as a risk to the improving outlook for the economy.

Observing that the rate increases since May were still working their way through the system, Governor Shaktikanta Das said, “The MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospects”.

The MPC, which lowered its CPI inflation forecast for the current fiscal year to 6.5% from the 6.7% it projected at its last policy meeting in December and raised its growth estimate for Q1 of the fiscal year beginning in April by 70 bps to 7.8%, also reiterated that it would stay focused on withdrawal of accommodation. Two of the panel’s six members, however, voted against the majority decision to raise rates.

Answering reporters’ questions on the Adani group, Mr. Das said the Indian banking sector was strong and that one case would not impact it.

“At this point of time, I would like to say that the Indian banking system, including the NBFC sector, continues to be resilient and strong. Based on our assessment, the large exposure guidelines of the RBI have been fully complied with by all the banks. The strength, the size and the resilience of the Indian banking system is now much larger and much stronger to be affected by an individual incident or a case,” the RBI Governor emphasised.

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“When banks lend money to a company, they do not lend on the basis of the market capitalisation of that particular company. They lend on the basis of strength of that company and fundamentals,” he added, without naming a company or group.

Speaking on the economy, Mr. Das said: “The Indian economy remains resilient… it has withstood successive global shocks over the last three years”.

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Noting that inflation had shown signs of moderation and the “worst is behind us”, Mr Das said still the RBI could not afford to take its eyes off inflation. “We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bring down inflation… monetary policy has to be tailored to ensuring a durable disinflation process,” he added.

The RBI chief said the real policy rate had moved into positive territory and the banking system had exited from the ‘chakravyuh’ of excess liquidity without causing any disruption. The<SU>monetary policy transmission was also picking up, he added.

The cut in the size of the rate increase to 25 bps also provided elbow room to the RBI to weigh all incoming data and forecasts to determine appropriate actions and policy stance, going forward, Mr. Das said.