RBI raises policy rate by 50 basis points to counter inflation

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On Friday, the Monetary Policy Committee (MPC) pushed the repo rate above the pre-pandemic level for the third time in a row, with an anticipated hike of 50 basis points, to rein in inflation at detail, which remains uncomfortably high.

With Friday’s rate hike, which was unanimously backed by all six MPC members, the repo rate is now at 5.40%, down from 4.90% previously.

The resolution on “deciding to remain focused on withdrawing accommodation to ensure that inflation remains on target going forward, while supporting growth” was supported by all members except the Professor Jayanth Varma.

The MPC had cut the repo rate cumulatively by 115 basis points (bps) during the March-May 2020 period from 5.15% to 4% to support the economy following the coronavirus pandemic. Covid-19.

The committee has now increased the repo rate cumulatively by 140 basis points over the May-August 2022 period, from 4% to 5.40%, to mitigate retail inflation.

The latest repo rate hike took place against the backdrop of June 2022, the sixth consecutive month that retail price inflation was at or above the upper tolerance level of 6% and outsized rate hikes from central banks in advanced economies resulting in portfolio outflows, thus weakening the Rupee.

The latest round of repo rate hikes will trickle down to lending and deposit rates, which will rise further.

CRISIL, in a report, said: “With a 140 basis point increase in the repo rate so far this fiscal year and a further increase at the start of the policy, the cost of deposits for banks is expected to increase by 25 to 30 basis points versus an increase in loan yield of 80-90 basis points.

“This difference is due to the liquidity crunch, the delay in loan resets, the combination of fixed and floating wallet accounts, debt instruments and the competition that banks face from non-banks and housing finance companies.

RBI Governor Shaktikanta Das pointed out that currently there are some signs that inflation based on consumer price index (CPI) has peaked. It is expected to moderate as we approach the fourth quarter of this year and the first quarter of next year.

“But inflation remains at uncomfortably or unacceptably high levels, and there are also several uncertainties clouding the outlook. Monetary policy must therefore act.

“…Measures must be taken to contain inflation and inflation expectations. Resilient economic activity gives us the space to act. And the aspect of growth is always considered and is always factored into MPC’s deliberations as well as its decisions,” Das said.

Whatever the approach

The Governor stressed that monetary policy will be calibrated, measured and agile according to the dynamics of inflation and economic activity.

“The focus will remain on ensuring a safe and soft landing for the economy. He is once again taking a no-hassle approach to getting the RBI into a third year.

“We had it (whatever the approach) in the first and second years of the pandemic and also now, given the challenges we face,” he said.

Umbrella stay strong

Referring to the fact that India is affected by the global economic situation, Das noted that the country is expected to be among the fastest growing economies in 2022-23 according to the IMF, with signs of moderating inflation. during the year.

He observed that exports of goods and services, as well as remittances, should keep the current account deficit within sustainable limits.

“The decline in the external debt-to-GDP ratio, net international investment position-to-GDP ratio, and debt service ratio in 2021–22 provides resilience to external shocks.

“The financial sector is well capitalized and solid. India’s foreign exchange reserves, supplemented by net term assets, provide insurance against global fallout. Our umbrella remains strong,” Das stressed.

State Bank of India Group Chief Economic Advisor Soumya Kanti Das said the 50 basis point hike is an indication that RBI is more concerned about the rupiah and the external situation i.e. ‘it uses the interest rate as a defense to protect the rupee.

“While the RBI may have anticipated the rate hikes, it remains to be seen how it influences the rupiah’s medium-term path…in a situation where the current account deficit is likely to breach 3.5% , raising rates could be the carry trade’s best bet to fund the large current account deficit,” he said.

RBI retained GDP and retail price inflation projections for FY23 at 7.2% and 6.7%, respectively.

Published on

August 05, 2022

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