Earlier, in an off-cycle or unplanned meeting of the MPC or Monetary Policy Committee RBI ascended the repo rate by 40 bps to 4.40 per cent. Now, in this month’s scheduled meeting RBI has hiked the repo rate by 50 bps taking the current figure to 4.90 per cent for, a second time. Repo rates are still below the pre-pandemic level mentions RBI Governor Shaktikanta Das as he pointed out that MPC’s decision is unanimous with the aim to recover the losses that occurred during Pandemic situations.
Repo Rate Hiked, GDP Growth Continued At 7.1 Percent
This increase was highly expected, this hike was not a surprise one, it was also declared by the RBI itself. A poll conducted by Bloomberg also suggested that the MPC will go for a hike of up to 50bps to 1 percent as voted by the majority. The rest of the participants suggested that a 40 bps hike will be announced.
The announcement of an increase in repo rate and reverse repo rate previously can be seen in the loans and mortgages. Also, the largest public sector lender famous for home loans, HDFC Bank, has hiked its prime retail lending rates, due to which the home loans are benchmarked by 35 bps. Whereas, ICICI Bank has also ascended its Marginal Cost of Fund-Based Lending Rate or MCLR, (means the rate below which the bank cannot sanction a loan) by 30 bps.
“It may be noted that around 75 per cent of the increase in inflation projections can be attributed to the food group. Further, the baseline inflation projection of 6.7 per cent for 2022-23 does not take into account the impact of monetary policy actions taken today,” RBI Governor Shaktikanta Das said.
Between February and April, headline inflation increased by about 170 basis points. With no resolution of the war in sight and the upside risks to inflation, prudent monetary policy measures would ensure that the second-round effects of supply-side shocks on the economy are contained and long-term inflation expectations remain firmly anchored and inflation gradually aligns close to the target. The monetary policy actions, including withdrawal of accommodation, will be calibrated keeping in mind the requirements of the ongoing economic recovery, Das said.
He also said that with inflation expectations of households moderating post the excise duty cuts on petrol and diesel on May 21, 2022, further reduction of state VATs on petrol and diesel across the country can certainly contribute to the softening of inflationary pressures as well as expectations.
“Today’s hike of 50bps on top of an inter-meeting 40bps hike in May is reflective of inflation elbowing its way to the top of the RBI’s priority list and it belatedly looking to catch up with the curve. The RBI’s upward revision of the inflation forecast for FY23 to 6.7 per cent from 5.7 per cent in April, was also in line with our expectations, but still lower than our forecast of 7.2% per cent. So, we believe that we are still far from the finishing line and that more frontloaded rate hikes are on the offing”, said Aurodeep Nandi, India economist and vice president at Nomura.
The 10-year bond yield has dropped 77 basis points to 7.46 as the rate hike was on expected lines and there was no further cash reserve ratio (CRR) hike from the Reserve Bank of India.
“While further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9 per cent remaining below the pre-pandemic level, the comment on the orderly completion of the government borrowing programme has served to cool the 10-year G-sec yield. We foresee further repo hikes of 35 bps and 25 bps, respectively, in the next two policies. However, the up march in the yields will now be somewhat shallower than our earlier expectations”, said Aditi Nayar, chief economist, ICRA.
Further, in line with the emphasis on the gradual withdrawal of accommodation articulated in the April and May MPC resolutions, systemic liquidity has moderated in the recent period. Surplus liquidity, as reflected in average daily absorption under LAF – that is, the absorption under SDF and variable rate reverse repo (VRRR) of 14 days and 28 days – at Rs 5.5 trillion from May 4-May 31 was lower than Rs 7.4 trillion during April 8-May 3, 2022.
Nevertheless, the overhang of excess liquidity has resulted in overnight money market rates, on average, trading below the policy repo rate, Das said.
Going ahead, while normalising the pandemic-related extraordinary liquidity accommodation over a multi-year time frame, the Reserve bank will ensure the availability of adequate liquidity to meet the production requirements of the economy. The Reserve Bank will also remain focused on the orderly completion of the government’s borrowing programme, he added.
Other Essential Points Announced By RBI Governor
E-Mandate Limit Hiked For Cards
- With the latest announcement, RBI also has increased the e-mandate limit on cards and Prepaid Payment Instruments or PPIs to 15,000 from the present 5,000.
Credit Cards And UPI To Be Linked
- Credit Cards can be linked with Unified Payments Interface or UPI, says the Governor.
Repo Rate Below Pre Pandemic Level
- Governor also mentioned that the repo rate are still below the Pre-COVID level. The government will take more precautionary measures to keep it descending.
Inflation Is Elevated
- RBI has forecasted a CPI inflation rate of 6.7 per cent for FY23 from the previous figure of 5.7 per cent. Governor also said, “Our steps will be calibrated, focussed on bringing down inflation to the target level.”
MSF And Bank Rates
- The Central Bank has increased the MSF rate and Bank rates to 5.15 per cent from 4.65 per cent, as announced by the Governor.
- The RBI Governor said, “The Ukraine war has led to the globalisation of inflation. During the challenging times, the Indian economy has remained resilient. The MPC noted that inflation risk has intensified further.”