RBI hikes rates again as it takes aim at inflation
- Central bank raises repo rate by 50 bps in second hike in as many months
- This is the second hike in as many months following the 40 basis points increase in an unscheduled meeting of the rate-setting panel in May. One basis point is 0.01%
The Reserve Bank of India (RBI) raised interest rates by a half percentage point, the steepest increase in more than nine years, and sharply lifted the full-year inflation forecast, setting the stage for more rate hikes this year as the central bank escalates its campaign to tame inflation, which is at an eight-year high.
The central bank’s monetary policy committee raised the repo rate, the rate at which it lends money to banks, to 4.9% on Wednesday. This is the second hike in as many months following the 40 basis points increase in an unscheduled meeting of the rate-setting panel in May. One basis point is 0.01%.
The latest rate hike sent policy rates above those prevailing after the pandemic struck India in March 2020, which prompted RBI to aggressively cut rates and open the liquidity floodgates. The repo rate is still 25 bps below the pre-pandemic level. However, surging inflation triggered by the Russian invasion of Ukraine, covid-related lockdowns in China and global supply chain disruptions have prompted RBI to embark on an aggressive policy-tightening cycle.
“We should expect RBI to continue with rate hikes in the remaining monetary policy committee meetings in 2022. We expect RBI to hike repo rate to near 6% by early 2023,” said Pankaj Pathak, fund manager-fixed income, Quantum Asset Management Co. Pvt. Ltd.
The six-member MPC also dropped the word accommodation from its stance and instead said the bank “will remain focused on the withdrawal of accommodation.”
In his interaction with reporters, RBI governor Shaktikanta Das said this change in stance was done to give greater clarity as the repo rate remains below and liquidity above the pre-pandemic level.
“Our approach underscores a commitment to move towards normal monetary conditions in a calibrated manner. We will remain focused on bringing down inflation closer to target and fostering macroeconomic stability,” Das said in his policy statement.
In a sign that price pressures were intensifying, RBI raised its inflation projection for the fiscal by a percentage point to 6.7%, with Das saying it would likely remain above the bank’s 6% upper tolerance band in the first three quarters of the fiscal. The monetary panel estimated that 75% of the increase in its forecast is due to higher food prices. The new forecasts are based on the assumption of a normal monsoon and crude oil prices averaging $105 a barrel.
“The upside risks to inflation as highlighted in the April and May 2022 policies have materialized earlier than anticipated—both in terms of timing and magnitude. Inflationary pressures have become broad-based and remain largely driven by adverse supply shocks. There are growing signs of a higher pass-through of input costs to selling prices,” Das said, noting that supply-side measures taken by the government in reducing excise duties on petrol and diesel, along with the other measures, would help in mitigating the inflationary pressures to some extent.
The committee, however, kept the economic growth forecast unchanged at 7.2%.
Citing the extremely uncertain outlook, Das refrained from giving any guidance on rate action and chose to be pragmatic and dynamic.
Economists, however, are expecting RBI to hike the repo rate by at least 25 bps in August, bringing the repo rate to the pre-pandemic level of 5.15%.
“The RBI MPC is expected to turn to calibrated tightening and deliver two more hikes of 25 bps each in FY23, taking the repo rate to 5.65% by Mar’23. The risk is a wide divergence vs RBI’s inflation projections, which could potentially lead to a steeper rate hike. The MPC could opt for another 50 bps move if the May and June inflation prints are substantially higher than our current expectations of 7.1% and 6.7%, respectively,” said economists at Bank of America Securities in a report.
Catch all the Business News , Economy news , Breaking News Events andLatest News Updates on Live Mint. Download TheMint News App to get Daily Market Updates.
Business NewsEconomyRBI hikes rates again as it takes aim at inflation
First Published:9 Jun 2022, 12:18 AM IST
- Top Gainers
- Top Losers
- 52 Week High