The RBI’s Monetary Policy Committee decided to raise the repo rate by 50 basis points (bps) to 5.9 percent with immediate effect. It maintains its policy stance of ‘withdrawal of accommodation.’ Since May of this year, the RBI’s rate-setting panel has raised 190 basis points in four subsequent monetary policy reviews, on friday.
While presenting the latest bi-monthly monetary policy statement, RBI Governor Shaktikanta Das said, “The world has been confronted with one crisis after another. Now, we are in the middle of another storm of global monetary tightening.”
The repo rate is the interest rate at which the RBI lends to the commercial bank. The hike in the repo rate will raise the loan EMIs for borrowers as the lenders are expected to follow the suit.
The RBI governor stated that the MPC believes continued inflation necessitates further withdrawal of monetary accommodation. To remain focused on ‘Withdrawal Of Accommodation,’ 5 of the 6 MPC members voted to raise the repo rate by 50 basis points.
Das said, “The standing deposit facility (SDF) rate is now at 5.65 per cent and the marginal standing facility (MSF) rate at 6.15 per cent.” The SDF is the lower band of the interest rate corridor, while the MSF is the upper band.
He stated that the global economic outlook remains bleak. Financial conditions are becoming tighter, and recession fears are growing. Across jurisdictions, inflation remains at alarmingly high levels. The pandemic’s and geopolitical conflict’s long-term effects are manifesting in demand-supply mismatches for goods and services.
“The MPC believed 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 the withdrawal of accommodation, while supporting growth,” he said.
India’s retail inflation in August soared to 7 per cent, compared with 6.71 per cent in July. The country’s GDP growth in the June 2022 quarter stood at 13.5 per cent.
The latest RBI action follows the US Federal Reserve affecting the third consecutive 0.75 percentage point interest rate increase, taking its benchmark rate to a range of 3-3.25 per cent earlier this month.
Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat, said, “The RBI MPC increase of repo rate of 50 basis points comes as no surprise to the market as the same was widely expected. The governor’s mention of doing away with forward guidance is a clear indication of the hawkish stance that the RBI is going to be adopting for the next few cycles, with policy responses evolving in response to changes in the external environment.”
According to Suvodeep Rakshit, senior economist at Kotak Institutional Equities, “the 50 basis point increase in the repo rate was in line with our expectations, though we had expected a slightly more hawkish tone to the policy communication.” We see the tone as more neutral, and the RBI appears to be confident in balancing external and domestic risks.”
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