WITH INFLATION continuing to remain sticky, the Reserve Bank of India Friday increased the repo rate by 50 basis points (bps) – the fourth rate-hike since May this year – to 5.90 per cent, with analysts expecting further monetary tightening in the coming months. The central bank also lowered the growth forecast to 7 per cent for the current financial year from 7.2 per cent in August on concerns over ‘bleak’ global economic outlook, but retained its retail inflation forecast at 6.7 per cent.
Reacting to the RBI move, the benchmark government bond yield ended at 7.39 per cent, after closing at 7.34 per cent Thursday. The stock markets bounced after seven straight sessions of decline with the BSE Sensex jumping 1,016.96 points (1.80 per cent) to close at 57,426.92.
In May, the RBI had hiked the repo rate (the rate at which the RBI lends money to banks to meet their short-term funding needs) by 40 bps. With Friday’s action – the third 50 bps hike in a trot – the RBI’s Monetary Policy Committee effected a 190-bps increase in the last five months since May. A basis point is one hundredth of one percentage point.
The six-member MPC, headed by the RBI Governor Shaktikanta Das, also decided to remain “focused on withdrawal of accommodation” to ensure that inflation remains within the target going forward, while supporting growth. The Monetary Policy Framework Agreement between the RBI and the government requires the central bank to keep inflation within the 4 per cent plus/minus 2 per cent band.
“The MPC was of the view that persistence of high inflation necessitates further calibrated withdrawal of monetary accommodation to restrain broadening of price pressures, anchor inflation expectations and contain the second-round effects. This action will support medium-term growth prospects… Accordingly, the MPC decided to increase the policy repo rate by 50 basis points to 5.9 per cent and to remain focused on withdrawal of accommodation, while supporting growth,” RBI Governor Shaktikanta Das said while announcing the monetary policy.
The 50 bps-hike, in line with market expectations, will result in higher borrowing cost for the new and existing customers of housing and auto loans. The immediate impact will be for borrowers with loans linked to the external benchmark linked lending rate (EBLR). For customers in the marginal cost of funds-based lending rate (MCLR) regime, the resetting of rates will happen with a lag.
When asked whether the MPC’s decision will continue to target inflation even as the rupee faces volatility after the US Federal Reserve announced a 75 bp rate hike and hinted at more hikes in future, Das said domestic factors will always be the guiding force. “There are two components in the monetary policy framework – inflation and growth. The MPC’s decisions are based on the twin objective, with primacy given to price stability driven by the necessity to keep growth in mind,” he told reporters during the post-policy press conference.
“Other than that, currency market fluctuations, depreciation or appreciation of the rupee is not a factor for consideration of the MPC. For dealing with those situations, the RBI has other instruments which will be deployed as per requirement,” he said.
The MPC retained the inflation projection at 6.7 per cent for 2022-23. It sees Q2 inflation at 7.1 per cent, which will further ease to 6.5 per cent in Q3 and to 5.8 per cent in Q4. The retail inflation is projected to further reduce to 5 per cent in the first quarter of the next financial year (2023-24).
The RBI Governor said the global geopolitical developments are weighing heavily on the domestic inflation trajectory. The consumer-price based inflation (CPI), or retail inflation, inched up to 7 per cent in August from 6.7 per cent in July. “The inflation level is high at present with August number at 7 per cent. And there is an expectation that the September number could be little higher than 7 per cent. But that has already been factored into our calculation and we have said that, this year, we will still be at 6.7 per cent,” Das noted.
Under the flexible inflation targeting framework, the RBI is expected to maintain retail inflation at 4 per cent (+/-2 per cent). The rate setting panel also lowered the real gross domestic product (GDP) for fiscal 2022-23 to 7 per cent, from a projection of 7.2 per cent announced during the August policy.
“The headwinds from extended geopolitical tensions, tightening global financial conditions and possible decline in the external component of aggregate demand can pose downside risk to growth,” Das said in his speech. Despite the geopolitical tensions, the underlying fundamentals of India are resilient and the buffers built over the years have helped in dealing with any external shock, he said adding that even the financial sector is displaying improved performance parameters on provision coverage ratio, asset quality and capital adequacy front.
The RBI Governor said the liquidity situation is in surplus and the RBI will continue with its two-way fine-tuning operations for injection as well as absorption of liquidity. On the rupee, Das said the movement of the domestic currency has been orderly when compared with most other countries.
About 67 per cent of the decline in reserves during the current financial year is due to valuation changes arising from an appreciating US dollar and higher US bond yields, he said. Since January till date, the country’s foreign exchange reserves have fallen by $95.218 billion.
“During the current financial year (up to September 28), the US dollar has appreciated by 14.5 per cent against a basket of major currencies. It (rupee) has depreciated by 7.4 per cent against the US dollar during the same period – faring much better than several reserve currencies as well as many of its EME and Asian peers,” he said.
Das said the rupee is a freely floating currency and its exchange rate is market determined. “The RBI does not have any fixed exchange rate in mind. It intervenes in the market to curb excessive volatility and anchor expectations,” he said. The currency rose 38 paise to close at 81.35 against the previous close of 81.73 to US dollar.