The Reserve Bank of India (RBI) on Wednesday raised its main benchmark rate, the Repo rate – the rate at which it lends money to commercial banks – for the second time in more than a month by 50 basis points expected in its attempt to tame runaway inflation. It projected inflation to remain above its upper tolerance range of 6% in the first three quarters of FY23 (April-December 2022).
The central bank has now raised the Repo rate by 90 basis points to 4.90% in five weeks, with the hikes expected to boost lending rates in the banking system and impact demand in the economy. Rising rates will force banks and non-bank financial firms to raise lending rates and result in higher monthly equivalent payments (EMI) for existing borrowers.
In addition, new home, car and personal loans will also become more expensive. However, analysts say consumption and demand may be affected by rising Repo rates
The RBI’s Monetary Policy Committee, in its bi-monthly policy review, maintained its previous growth projection of 7.2% for 2022-23, although it admitted ‘inflationary concerns’ and ‘negative spillovers’. » geopolitical tensions, an increase in cost contributions and tightening of financial conditions. The World Bank on Tuesday lowered its growth forecast for India for the current fiscal year to 7.5%, a sharp drop of 1.2 percentage points from its previous forecast of 8.7%.
The best of Express Premium
The RBI also forecast inflation to rise to 7.5% for April-June this year and 6.7% for the full year, up sharply from the 5.7% it had forecast. expected in April for the full year and well above its 6%. upper tolerance threshold.
Tightrope walker for the RBI
To minimize disruption to growth while stifling inflationary pressures, the RBI’s 50 basis point rate hike shows a calibrated pullback from the dovish stance. By not increasing the CRR, the central bank ensured that banks were not forced to lend.
Supporting that the economy remains resilient to global challenges and is enjoying a recovery, RBI Governor Shaktikanta Das highlighted increased rail, port and air traffic, GST recoveries, improved capacity utilization, increased bank credit disbursements and signs of improvement in rural and urban areas. request. The RBI’s policy panel, chaired by the Governor, also voted unanimously to remain focused on “withdrawing from accommodation” to ensure inflation remains on target going forward. Marking the end of the low interest rate regime, the RBI had on May 4 raised the Repo rate by 40 basis points and the Cash Reserve Ratio (CRR) by 50 basis points, leading to higher lending and deposit rates by banks.
Buy now | Our best subscription plan now has a special price
“Our effort will be to get closer to the 4% objective (plus or minus 2%). We believe that our actions will have an impact on reducing inflation and inflation expectations and we are committed to reducing it,” Das said. He added that the central bank is now focused on withdrawing accommodative policy as excess liquidity remains above pre-pandemic levels while rates are still below pre-pandemic levels.
When asked if the RBI would be aggressive in its approach to fighting inflation, he said that the future course of action of the RBI would depend on the development of inflation and said that the situation was very uncertain. “These are extremely uncertain conditions, and it is not possible to outline guidance … we will deal with it as the situation unfolds,” Das said. Speaking to the media later, he said RBI did not want to take “rushed and abrupt action that could be detrimental to the system and the markets”.
Despite the challenges of inflation, the Governor indicated continued support for the economy. He said the cash withdrawal will be “calibrated and measured” and ensure it meets the credit demands of the ongoing economic recovery. Stating that capacity utilization improved to 74.5% in the quarter ended March 2022 from 72.4% in the previous quarter, Das said capacity utilizations are expected to increase further in 2022-23.
“Going forward, while normalizing the extraordinary accommodation of pandemic-related liquidity over a multi-year period, the Reserve Bank will ensure that adequate liquidity is available to meet the productive needs of the economy. The Reserve Bank will also remain focused on the orderly completion of the government’s borrowing program,” the governor said in his statement.
Stressing the resilience of the economy, the governor said he did not see any crisis-like situation. While he expects the current account deficit to remain at sustainable levels, “we have built up strong buffers and reserves that will help us in any situation,” Das said. While projecting inflation of 6.7% for the current fiscal year, he said 75% of the increase in inflation projection can be attributed to food inflation, which in turn is linked to the war in Ukraine.
In its bi-monthly statement, the MPC said headline inflation rose by about 170 basis points between February and April and “with no war resolution in sight and upside risks to inflation, policy measures Prudent monetary policy would ensure that the second-round effects of supply-side shocks to the economy are contained, long-term inflation expectations remain firmly anchored, and inflation gradually aligns with the target. Monetary policy actions, including the withdrawal of accommodative measures, will be calibrated taking into account the demands of the ongoing economic recovery, he said.
Prior to the May 4, 2022 hike, the RBI raised the Repo rate by 25 basis points for the last time to 6.50% in August 2018. From the 8% level in January 2014, the Repo rate was reduced to 4 % in May 2020. after the RBI cut rates over the years to boost growth – the last cut was 40 basis points in May 2020 to cope with the negative impact of the pandemic.