Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday announced that the central bank's Monetary Policy Committee (MPC) raised the repo rate by 50 basis points to 5.40 percent in its bi-monthly policy meeting. A repo rate is the rate at which the central bank of a country lends money to commercial banks.

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This is the third consecutive rate hike by the RBI. The RBI's decision is a response to a spike in inflation that has forced major central banks around the world to raise rates.

The RBI maintained its retail inflation forecast at 6.7 percent while it has retained the GDP growth forecast at 7.2 percent for this year.

With strong and resilient fundamentals, India is expected to be the fastest growing economy in FY23, said Das.

However, he added that sustained high inflation could destabilise expectations and harm growth in the medium term.

Also Read: RBI hikes repo rate by 50 basis points for second time in a row to tackle inflation

Here are the key highlights:

The MPC unanimously voted to hike the repo rate by 50 bps to 5.40 percent and keep the stance unchanged.

Focus remains on withdrawal of 'accommodation' to ensure that inflation remains within the target going forward, while supporting growth.

Domestic economic activity resilient, progressing broadly along the lines of the June MPC resolution.

Consumer price inflation eased from its surge in April but remains uncomfortably high.

Volatility in global financial markets is impinging upon domestic financial markets.

Inflation Forecast

CPI Inflation projection for FY23 retained at 6.7 percent

Q2 CPI seen at 7.1 percent vs the earlier 7.4 percent

Q3 CPI seen at 6.4 percent vs the earlier 6.2 percent

Q4 CPI projection retained at 5.8 percent

Q1 FY24 CPI seen at 5 percent

Incipient signs of factors that could lead to further softening of domestic inflationary pressures

There remain significant uncertainties with respect to inflation

Also Read: RBI retains retail inflation forecast at 6.7% for FY23

Growth Forecast

Real GDP growth forecast for FY23 retained at 7.2 percent

Q1 FY23 GDP growth forecast retained at 16.2 percent

Q2 FY23 forecast retained at 6.2 percent

Q3 FY23 forecast retained at 4.1 percent

Q4 FY23 forecast retained at 4 percent

Q1FY24 GDP growth seen at 6.7 percent

Domestic economic activity remains resilient

Rural demand indicators exhibited mixed signals

Capacity utilisation in manufacturing sector now above its long-run average, signaling need for fresh investment activity in additional capacity creation

Increase in capacity utilisation, govt’s capex push, large expansion in bank credit should support investment activity

Also Read: GDP growth projection for 2022-23 is retained at 7.2%: RBI Guv Shaktikanta Das

Liquidity

Surplus liquidity has come down to Rs 3.8 lakh crore during June-July from Rs 6.7 lakh crore during April-May

RBI will remain vigilant on liquidity front, conduct two-way fine-tuning operations as warranted (VRR and VRRR)

Also Read: SBI, ICICI Bank, Tata Motors rise but HDFC, SBI Cards, Maruti fall after RBI's 50-bps hike

On Rupee

The governor said that the rupee has moved in a relatively orderly fashion depreciating by 4.7 percent in FY23 against dollar, faring much better than several reserve currencies and EME and Asian peers

Depreciation of the rupee is more on account of the appreciation of the US dollar rather than weakness in macro fundamentals of Indian economy

Market interventions by RBI have helped in containing volatility

RBI has ensured orderly movement of the rupee

RBI will remain watchful and focused on maintaining stability of rupee

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Additional Measures

Master Direction on Managing Risks in Outsourcing of Financial Services.

To issue draft RBI (Managing Risks and Code of Conduct in Outsourcing of Financial Services) Directions, 2022, for public comments shortly

Inclusion of Credit Information Companies (CICs) under RBI’s Integrated Ombudsman Scheme

Standalone Primary Dealers (SPDs): Proposed to enable SPDs to offer all foreign exchange market-making facilities as currently permitted to Category-I Authorised Dealers. Permitting SPDs to deal in offshore Foreign Currency Settled Overnight Indexed Swap Market

Committee on MIBOR Benchmark: To set up a committee to undertake an in-depth examination of issues, including need for transition to an alternate benchmark

Enabling Bharat Bill Payment System (BBPS) to process cross-border inbound bill payments

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