This is the fourth rate hike by the central bank in this financial year. Prior to this, the RBI had raised the repo rate – by 40 bps in an off-cycle meeting in May and 50 bps in June and August. The market experts expected the MPC to raise the repo rate by 50 basis points (bps) in this meeting to tame the raging inflation and a falling rupee which hit an all-time low earlier this week following a strengthening of the dollar.
The retail inflation or Consumer Price Index (CPI), which the RBI factors in while considering its benchmark lending rate, stood at 7.00 per cent in August. Retail inflation has continued to remain above the central bank’s comfort level of 6 per cent since January this year.
The RBI governor further announced that the standing deposit facility (SDF) rate stands adjusted to 5.65 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.15 per cent. He said that the MPC decided by a majority of 5 out of 6 members to remain focused on the withdrawal of accommodation to ensure that inflation remains within target going forward.
In his speech today, Das said that the world is in midst of a third major shock from aggressive monetary tightening by central banks. He explained that there is nervousness in the financial market and the global economy is eye of new storm. He noted that the Indian economy continues to be resilient in midst of global turmoil.
Commenting on the inflation, Das said that the inflation trajectory remains clouded with uncertainties arising from continuing geopolitical tensions and nervous global financial market sentiments. “Today, inflation is hovering around 7 per cent and we expect it to remain elevated at around 6 per cent in second half of 2022-23,” he said.
Speaking about the GDP, Das said that while real GDP growth in Q1 turned out to be lower than our expectations, the late recovery in kharif sowing, the comfortable reservoir levels, improvement in capacity utilisation, buoyant bank credit expansion and the government’s continued thrust on capital expenditure are expected to support aggregate demand and output in the second half of 2022-23.
The central bank cut the 2022-23 growth projection to 7 per cent from its previous estimate of 7.2 per cent. Das said that the real GDP growth for 2022-23 is projected at 7.0 per cent with Q2 at 6.3 per cent, Q3 at 4.6 per cent and Q4 at 4.6 per cent, with risks broadly balanced. While the growth for Q1 of 2023-24 is projected at 7.2 per cent.
How economists and market experts reacted:
- Adhil Shetty, CEO at BankBazaar.com said, “The writing on the wall was clear. A 50 bps hike by the Reserve Bank of India was expected as the apex bank is taking all measures to fight inflation. As the repo rate has increased by 190 bps to 5.90 per cent, it will have a huge impact on borrowers – both new and existing. Existing borrowers will see their EMIs or loan tenors increase with the latest rate hike. I reiterate my earlier advice that borrowers can prioritise pre-payments to control their loan interest. This will help them in reducing their loan tenors and EMIs. Economies across the globe are grappling with recessionary trends. A time like this calls for people to calibrate their finances to adjust for these difficulties.”
- Ritika Chhabra, Economist and Quant Analyst at Prabhudas Lilladher said, “The outcome of the MPC meeting is on expected lines as RBI raised the repo rate by 50 bps. The central bank gave a very balanced guidance emphasizing on continuing resilient domestic economic growth with risks being rising instability in the global economic and financial environment. Overall the markets have reacted positively to the policy announcement.”
- Dhruv Agarwala, Group CEO at Housing.com, PropTiger.com and Makaan.com, said, “The 50-basis point hike in repo rate to 5.9% was expected as the RBI intensifies its efforts to tame inflation. While banks will eventually be forced to pass on this increased cost to borrowers, the possibility of this happening during the ongoing festive season is low. Considering that a large number of home buyers in India make their purchase decision during this time of the year, financial institutions would not like to dampen the festive spirit by effectuating a rate hike immediately. Even when they do so, the robust buyer sentiment along with renewed investors’ interest in the residential real estate market is likely to continue to support the demand for homes in India.”
- Niraj Kumar, Chief Investment Officer at Future Generali India Life Insurance Company said, “MPC continues to do a fine balancing act, despite the adverse global backdrop of chaos in rates and FX markets due to hyper-aggressive stance of central banks to rein in the elevated Inflation. RBI has stuck to its overarching focus of nurturing the nascent recovery of growth and has avoided any sort of collateral damage so far and continues to bubble wrap the economy. Clearly, with today’s frontloading of rate hikes, the future course of rate hikes appears to be very shallow, given the imminent softer patches of global growth and receding Inflation trajectory. Overall ‘well thought out and a balanced policy”
- Dhiraj Relli, MD & CEO at HDFC Securities said, “The MPC voted to raise the repo rate by 50 bps taking it to 5.9% as widely expected while remaining focused on the withdrawal of accommodation. A higher rate hike is justified in the backdrop of inflation remaining at elevated levels with the projected trajectory being above RBI’s target during the entire forecast horizon. Economic growth has remained resilient in the face of an adverse global environment. The recent sharp depreciation in the rupee (although well managed compared to other emerging countries) might have weighed on members’ decision in favour of a larger rate hike, addressing external sector imbalance and reducing the interest rate differential. Unchanged inflation forecast at 6.7% for FY23 (and 5% in Q1FY24) is reassuring with a high average crude oil price of US$ 100 per barrel considered in this, providing a cushion. FY23 GDP projection was lowered marginally from 7.2% to 7% for FY23. Overall, it was a prudent policy announcement with no negative surprises which is reflected in the impact on the 10-year yield and stock markets. The next stage of response could be calibrated; we expect the terminal repo rate would be 6.25-6.40% by FY23 end.”