THE REPO RISE SURPRISE

After resisting the urge for nearly two years, the RBI (Reserve Bank of India) finally bit the bullet on May 4. It hiked the repo rate, or the rate at which it lends to commercial banks, by 40 basis points (bps, 1 bps is a hundredth of a percentage point), taking it to 4.4 per cent. No one saw it coming, especially as the RBI’s quarterly monetary policy committee (MPC) meeting in April gave no such inkling, though the inflation numbers were looking troubling even then. You are already paying high food and fuel prices, now add costlier loans, be it personal, auto or housing.

The first hike since the pandemic began, it restores the repo rate to the April 2020 level. The RBI also increased the cash reserve ratio (CRR) requirement by 50 bps to 4.5 per cent. CRR is the share of deposits banks are mandated to park with RBI. The move will remove a large amount of cash from the banking system, crimping the banks’ ability to lend. RBI’s announcement came hours before its US counterpart, the Federal Reserve or Fed, announced a 50 bps hike in its short-term interest rate, its most aggressive move since 2000 as it fights its worst inflation in 40 years.

Indian stock markets reacted immediately to the hike, with the BSE Sensex falling 1,307 points on May 4. US stock markets remained stable on May 4 as investors had factored in the impending rate hikes, but went into a tailspin thereafter. On May 5, the Dow Jones Industrial Average lost 1,063 points or 3.12 per cent, its worst single-day drop since 2020.

The moves by the central banks signal the end of the low interest regime that helped businesses and individuals borrow cheaply, boosting growth. The hike itself wasn’t the surprise—many anticipate even a 100 bps hike this financial year—its timing was. In April, RBI’s MPC had chosen to maintain status quo and ignore inflation. Consumer price inflation rose to 6.95 per cent in March from 6.07 per cent in February and 6.01 per cent in January. In April, it is likely to be 7.4-7.5 per cent. It will be the fourth month in a row when inflation will breach the RBI’s 6 per cent outer limit. “The RBI suddenly feels inflation is a much greater threat than it had earlier thought,” says Madan Sabnavis, chief economist with the Bank of Baroda (BoB). “Also, inflation could continue to be in the range of 7 per cent for a longer period of time.” If inflation

exceeds the 4–6 per cent range for three consecutive quarters, the MPC will have to offer an explanation in Parliament.

The common man has been feeling the inflationary pinch for a while now. Petrol cost Rs 120.51 in Mumbai and Rs 105.41 in Delhi, while diesel cost Rs 104.77 in Mumbai and Rs 96.67 in the capital on May 9. Cooking gas cost nearly Rs 1,000 a cylinder in Mumbai and Delhi. Higher fuel prices have had a cascading impact across the supply chain, making production and transportation of goods dearer. Industry, meanwhile, is battling costlier inputs, with steel, aluminium, copper and nickel prices rising 10-15 per cent.

Most experts anticipate the next hike as early as June 6-8 when the MPC meets again. The RBI has been widely criticised for not using the most potent weapon at its disposal to combat inflation, especially as the war in Ukraine extended. Crude prices shot up sharply following Russia’s invasion in February— Brent crude was trading at $110 a barrel on May 9. India’s crude import has gone up to 212.2 million tonnes in 2021-22 from 196.5 MT the previous year.

The rate hike is also perhaps to fortify the rupee, which has been taking a beating recently. On May 9, it stood at 77.5 to a dollar, its lowest ever. “The RBI has already spent $10-15 billion trying to defend the rupee in the forex market. The reserves have gone down to $600 billion or even lower, so that could be another consideration for the RBI to hike rates,” says Sabnavis.

But the hike will also make loans costlier, heralding doom for the real estate sector, among others. “Unfortunately for home buyers, this hike signals an imminent end to the all-time low interest regime,” says Anuj Puri, chairman of the Anarock Group, a real estate consultant. Experts also expect the rate hike to slow growth. “We believe our current growth forecast of 7.47.5 per cent is likely to go down by further 25 basis points on account of the higher borrowing cost,” said a note from BoB. Meanwhile, Crisil has said it expects RBI to hike the repo rate by another 75-100 bps this fiscal. The ordeal is far from over. ■

“SUDDENLY, THE RBI FELT INFLATION WAS A GREATER THREAT THAN IT EARLIER THOUGHT” -MADAN SABNAVIS Chief Economist, BoB