After delivering its fifth straight rate hike, the Reserve Bank on Wednesday said "the worst of inflation is behind us" and signalled that the battle for price stability is bearing fruition.
Earlier in the day, the Reserve Bank of India's Monetary Policy Committee (MPC), in a 5:1 decision, delivered a market-expected 35 bps repo rate hike, taking the key policy rate to 6.25 per cent.
The Reserve Bank ended three years of low interest rate regime in May when after an unscheduled MPC meeting, it announced a 40 bps hike in the repo rate from 4 per cent. Since then, in three successive monetary policy reviews, the MPC has hiked the policy rate by 50 bps in each round.
Lowering the size of the rate hike (from three rounds of 50 bps each to 35 bps on Wednesday) does not mean that there is room for any complacency on the inflation battle and the policy stance is far from neutral, Governor Shaktikanta Das and Deputy Governor Michael D Patra told reporters at the customary post-policy presser at the RBI headquarters here.
Defending the lower quantum of rate hike, Das said the move stems from its data-driven belief that "the worst of inflation is behind us... but that does not mean that there is any room for complacency on the battle to tame inflation."
However, assuaging the market (the bond market reacted negatively to the more-than-expected hawkish policy stance), Patra said "the battle against inflation is far from over and so is our neutral stance... until we see a durable decline in inflation and it stays within the tolerance band... But the good thing is that we've lowered the size of the policy rate change. That is the most important thing."
"After three continuous 50 bps increases, we've now moderated it to 35 bps so that tells you of a shift in the wind because as the governor has pointed out, we feel that the worst of inflation is behind us. But the moderation in inflation is very uneven, so we must first bring inflation firmly under the tolerance band," Patra who heads the monetary policy department, said.
But Governor Das was quick to underline that "while inflation is moderating for us and globally, we also recognise that there is no room for complacency. We have to be extremely watchful. And we'll have to be nimble in our actions and watchful and we've to act should it become necessary. Therefore, I say the battle against inflation is not over and so there is no room for complacency, because we're living in an uncertain world, with extremely uncertain outlook."
Going forward, the governor said the RBI will continue to go by the domestic factors, and watching the incoming data.
On India's GDP growth, while moderating its forecast by 20 bps to 6.8 per cent for the current fiscal, Das said, "Our economy is resilient and it's holding on and it is doing well in a world of slowing growth and possibilities of recession across several countries."
Similarly, on the currency situation, he said "the story of the rupee is one of resilience and stability and we remain committed to act to prevent excessive volatility of our exchange rate. And our focus will continue to be on orderly evolution of the exchange rate."
Citing the rising services exports along with growing remittances cushioning the contraction in merchandise shipments, Das said "current account deficit is eminently manageable. Let there not be any doubt about it. And to amplify it further, foreign exchange reserves have gone up from USD 524 billion in October to USD 561 billion on December 2."
The governor also pointed to the comfortable external debt ratios.
"So overall, I'd say that our economy is doing overall well and the overall status of our economy is that it's resilient. And I think we stand out as an island of resilience in an otherwise volatile and gloomy world," Das noted.
Regarding the impact of the Federal Reserve's actions on RBI's policy moves, Das admitted that the US central bank's decisions are important for the whole world.
"...but our policies are primarily governed and determined by our domestic factors, the domestic scenario on growth and inflation. It is not a case that we look at the Fed policy rate and take our decisions. We make our monetary policy rate stance based on our domestic factors," he said.