RBI Governor Shaktikanta Das. File | Photo credit: PTI

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

Observing that rate hikes since May continued to work 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 underlying inflation and thus strengthen 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 estimate to growth for the first quarter of the fiscal year beginning in April of 70 basis points to 7.8%, also reiterated that it would remain focused on the withdrawal of accommodation. Two of the six panel members, however, voted against the majority decision to raise rates.

Responding to reporters’ questions about the Adani Group, Das said India’s banking sector was strong and a single case would not impact it.

“At this point, 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 RBI large exposure guidelines have been fully complied with by all banks. The strength, size and resilience of the Indian banking system is now much greater and much stronger to be affected by any individual incident or case,” the RBI Governor emphasized.

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“When banks lend money to a company, they’re not lending based on the market capitalization of that particular company. They lend based on the strength of this business and its fundamentals,” he added, without naming any company or group.

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

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Noting that inflation had shown signs of moderating and “the worst is behind us”, Das said the RBI still could not afford to take its eyes off inflation. “We need a decisive moderation of inflation. We must remain steadfast in our commitment to reducing inflation…monetary policy must be adapted to ensure a sustainable disinflation process,” he added.

The RBI chief said the real policy rate moved into positive territory and the banking system emerged from the “chakravyuh” of excess liquidity without causing disruption. The transmission of monetary policy is also accelerating, he added.

Reducing the size of the rate hike to 25 basis points also gave leeway to the RBI to weigh all incoming data and forecasts to determine appropriate actions and policy direction going forward, said Mr. Das.