RBI hikes rates to tame prices
RAISES REPO RATE BY 50 BPS TO 4.9%; TO FOCUS ON WITHDRAWAL OF ACCOMMODATION FY23 GDP GROWTH FORECAST STAYS AT 7.2%; INFLATION PROJECTION JUMPS TO 6.7%
The six-member Monetary Policy Committee of the Reserve Bank of India (RBI) on Wednesday unanimously decided to increase the policy repo rate by 50 basis points (bps) to 4.9 per cent while raising the inflation forecast by 100 bps to 6.7 per cent for this fiscal year, giving rise to expectations of further monetary tightening in the coming months.
The second hike in the repo rate in just over a month will lead to an increase in lending rates, causing borrowers to feel the pinch of higher equated monthly instalments.
The RBI kept its growth forecast unchanged at 7.2 per cent for FY23.
RBI Governor Shaktikanta Das said during the post-policy interaction with the media: “There is a stance and our stance is withdrawing accommodation … we are now focusing on that. But in terms of rates, we are still below the pre-pandemic level. In terms of liquidity, surplus liquidity in the market is higher than the pre-pandemic level. In that sense the stance remained accommodative.”
The repo rate before the pandemic came was 5.15 per cent.
The stance remained “accommodative” since the start of the pandemic because the central bank’s focus was on growth. The Russian invasion of Ukraine forced it to focus on inflation in the April review of the monetary policy.
“Liquidity withdrawal will be calibrated and measured. And we will ensure adequate liquidity to meet the credit requirements of banks,” Das said.
OUR FUTURE ACTION WILL DEPEND ON THE EVOLVING INFLATION-GROWTH DYNAMICS. THE SITUATION IS FAST CHANGING…THE RBI IS NOT BOUND BY ANY STEREOTYPE OR CONVENTION
Shaktikanta Das, Governor, RBI
As of December 2021, a little over 39 per cent of banking-system loans were linked to an external benchmark, which is mostly the repo rate. Around 58.2 per cent of home loans are linked to external benchmarks.
About 53 per cent of the loans of the banking system are linked to the marginal cost of fund-based lending rate (MCLR). Most banks have increased their MCLR after the 40-bp repo rate hike in May.
While lending rates will go up immediately, an increase in fixed-deposit rates may take time because the banking system is flush with liquidity.
Das said he expected deposit rates too to increase.
He said inflationary pressures had intensified further. “75 per cent of the increase in the inflation projection compared to what we had made in April is attributed to food inflation. Primarily food inflation is linked to external factors, namely the war in Europe,” Das said. The central bank now projects the CPI (consumer price index) inflation rate above the upper tolerance threshold of 6 per cent till the October-december quarter.
Inflation for the last quarter of FY23 is seen at 5.8 per cent.
Das said risks to inflation were from high commodity prices, revisions in electricity tariffs in many states, high domestic poultry and animal feed costs, etc. He cited the recent spike in tomato prices.
All this is apart from elevated international crude oil prices — the most important of all. Bond markets responded positively to the policy, proved by the rally at the shorter end. The 10-year benchmark government bond fell 8 bps after the rate hike came in line with expectations and there was no hike in the cash reserve ratio.
Economists are expecting aggressive hikes in the coming months. “We retain our projection for the terminal repo rate at 6.25 per cent by April 2023, with a 35-bps rate hike in August, followed by 25 bps rate hikes in the following four policy meetings. Risks are skewed towards more front-loaded hikes and higher terminal rates,” Nomura India said in a report.