RBI Policy: Yet Another Hike In Repo Rate

As predicted by many economist and experts, the Reserve Bank of India (RBI) Governor Shaktikanta Das announced that the bank has increased the repo rate by 50 basis point (bp). This hike shows the singular focus on inflation of the monetary policy committee (MPC). One bp is one hundredth of a percentage point. With this, the MPC has hiked the repo rate -- at which the RBI lends short term funds to banks -- by a total of 140 bps in the current rate hike cycle.

The third consecutive rate hike is in the backdrop of high retail inflation that is hurting all walks of life and that’s unlikely to change in the foreseeable future. The key takeaway from Das’s speech is that high inflation could destablise the economy. Also, don't miss the emphasis on the withdrawal of accommodative policies. This means further rate hikes cannot be ruled out.

RBI’s rate-setting panel -- the Monetary Policy Committee (MPC) -- met for three days from August 3 to deliberate on the prevailing economic situation. “MPC decided to focus on withdrawal of accommodation to keep inflation within target while supporting growth,” RBI Governor Shaktikanta Das said.

The Committee decided that the Standing Deposit Facility (SDF) rate stands adjusted to 5.15 per cent and the Marginal Standing Facility (MSF) rate and bank rate at 5.65 per cent. The real GDP growth projection for 2022-23 is retained at 7.2 per cent with Q1 - 16.2 per cent, Q2 - 6.2 per cent, Q3 - 4.1 per cent and Q4 - 4 per cent with risks broadly balanced.

Furthermore, the real GDP growth for Q1 2023-24 is projected at 6.7 per cent, Shaktikanta Das stated.

In its off-cycle monetary policy review in May, the RBI hiked the policy repo rate by 40 basis points or 0.40 per cent to 4.40 per cent. Then in June, the RBI further raised the rate to 4.90 per cent, a 50 basis points increase.

Commenting on the latest development, Vikas Garg- Head of Fixed Income, Invesco Mutual Fund said that they expect market volatility to remain high with fast-evolving global backdrop.

“MPC stays on course with a 50 bps repo rate hike maintaining its tight vigil on inflation. Retaining FY23 inflation projection at 6.7 per cent highlights global uncertainties. Continuation with “withdrawal of accommodation” signals more rate hikes to come as healthy economy provides space. Overall, a more hawkish policy than the recent market expectations and reiterates the need to anchor inflation expectations. We expect market volatility to remain high with fast evolving global backdrop,” Garg said.

Anarock Chairman Anuj Puri said that a rate hike was expected, but the expectation was for a maximum of 35 bps. The hike by 50 bps is definitely on the higher side, and home loan lending rates will now edge further into the red zone.

“This is the third consecutive rate hike in the last two months and finally marks the end of the all-time best low-interest rates regime -- one of the major factors that drove housing sales across the country since the pandemic. This whammy comes along with the inflationary trends of primary raw materials, including cement, steel, labour and others, that have recently led to a rise in property prices. Together, these factors – rising home loan rates and construction costs – will impact residential sales that did reasonably well in the first half of 2022. As per ANAROCK Research, approx. 1.85 lakh units were sold in H1 2022 across the top 7 cities,” Puri said. 

Pradeep Multani, President, PHD Chamber of Commerce and Industry said that 50 bps increase in policy repo rate by RBI is in line with the PHD Chamber’s expectations as many economies are increasing the policy interest rates, however, it will have a significant impact on the costs of doing business, which are already high.

RBI’s decision to raise the repo rate is in response to the headwinds being faced by Indian economy including high inflation, uneasy financial markets, foreign portfolio outflows, majorly caused by distress in the global economic situation, said Multani.

Another reassuring message by RBI has been the greater resilience shown by India against the external shocks with significant improvement in the external debt to GDP ratio, net international investment position to GDP ratio, debt servicing ratio and sufficient foreign exchange reserves. This will boost the confidence of businesses and investors on the Indian economy.

Multani said that any further increase in the repo rate will impact India’s economic growth due to impact on demand scenario and consumer and business sentiments. 

Meanwhile, Rajni Thakur, Chief Economist, RBL Bank said that further hikes towards 6 per cent terminal repo rate seem imminent.

“MPC announcements this morning were largely on expected lines. The markets had broadly priced in 50 bps hikes in Repo rates and any forward guidance would have mattered more than the rate action itself. The policy statement however, stayed away from any explicit forward guidance while remaining consistent on its assessment of growth and inflation trajectory for the economy. Any mention of nature and quantum of intervention, to manage currency faced with huge capital outflows didn’t find a place as well. Nevertheless, given the growth-inflation outlook, further hikes towards 6% terminal repo rate seem imminent, even though the pace of hike will likely be softer going ahead. Continued ‘focus on withdrawal’ indicates further drawdown of excess liquidity as well, in which case, monetary tightening is far from over yet,” she said.

Indranil Pan, Chief Economist, Yes Bank said that as the trajectory of CPI inflation is pointing downwards, we expect the RBI to moderate the pace of hikes and raise the repo rate by 25-35 bps in September and 25 bps in December.

“RBI delivered a 50 bps hike in the repo rate as it continues its effort towards frontloading of interest rate increases, while ensuring that the second-round effects of the supply side shocks are contained and long-term inflation expectations are anchored. With data indicating slowing global growth, central bankers have started to highlight that data will significantly determine the pace of monetary policy tightening going forward. Thus, we point to a more data driven RBI from here on (like most other Central Banks across the world). As the trajectory of CPI inflation is pointing downwards, we expect the RBI to moderate the pace of hikes and raise the repo rate by 25-35 bps in September and 25 bps in December to 5.90-6.00 per cent and pause thereafter to assess the growth-inflation dynamics,” Pan said.

Mitul Shah, Head of Research at Reliance Securities said that 50bps repo rate hike to 5.4 per cent by the RBI makes the policy rate is the highest since Aug’19. On the positive note, maintaining the real GDP growth forecast of 7.2 per cent for FY23 is liked by street. It seems to be more worried about external global factors this time, which has weakened INR recently.

“The 3rd consecutive rate hike by RBI since May’22 cumulatively 140 bps in its effort to contain inflation would certainly increase cost of borrowing and would impact few consumer sectors. We expect real estate sector to remain most affected, while financial sector would be benefitted with the likely NIM expansion with higher spread,” Shah added.