Home / Industry / Banking /  RBI hikes repo rate as it steps up battle to contain inflation

The Reserve Bank of India’s monetary policy panel lifted interest rates by 50 basis points for the third straight time, joining a procession of central banks that have raised rates to rein in the effects of a soaring dollar and rising prices.

RBI’s repo rate now stands at 5.9%, taking the tally of rate hikes to 190 bps since May. The rate increase matched the forecasts of all 10 economists surveyed by Mint.

The six-member rate-setting panel voted five to one in favour of raising the rate by half a percentage point, with Ashima Goyal voting for a 35 bps hike. In a split decision, the panel also maintained its stance of “withdrawal of accommodation", with only Jayanth Varma dissenting.

The MPC’s decisions are guided by two factors—inflation and growth, RBI governor Shaktikanta Das said. “Currency market fluctuations—like depreciation or appreciation of the rupee—are not a factor for the MPC to consider. RBI has other instruments for dealing with such situations, which would be deployed as required," Das said.

Rate relief
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Rate relief

Central banks are racing to hike interest rates to combat soaring inflation and the effect of a strong dollar on their economies, as the US Federal Reserve continues on an aggressive path to hike rates. Being the currency of global trade, the relentless rise of the dollar fuels inflation and hurts growth in countries dependent on energy and food imports.

RBI, too, is grappling with stubbornly high inflation, exacerbated by geopolitical tensions, droughts and supply-chain disruptions.

“The fact that RBI kept the policy stance unchanged as ‘withdrawal of accommodation’ indicates the door is open for a further hike in the policy repo rate. The terminal rate expectation in the bond market has moved up to 6.5%," said Pankaj Pathak, fund manager-fixed income, Quantum AMC. “Aggressive monetary tightening in advanced economies will continue to weigh on domestic monetary policy. It would be difficult for RBI to soften its stance in such a hostile global environment. Over the last few months, declining banking system liquidity has put upward pressure on short-term money market rates. However, RBI seems comfortable with prevailing liquidity conditions, and there was no indication of durable liquidity infusion at this stage."

In the post-policy press conference, Das refrained from committing to any guidance on liquidity level, operating rate, or real interest rate level that would trigger a change in stance at this stage.

“MPC was of the view 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," Das said.

Stocks rallied after the RBI’s policy announcement. The BSE Sensex gained 1.8% to close at 57,426.92. The yield on the benchmark 10-year bond rose to 7.4%. RBI also downgraded its growth forecast modestly, while its inflation projection was unchanged. The growth forecast for FY23 was cut to 7% from 7.2%. RBI, however, remains confident about growth prospects even as June quarter growth was lower than expected.

RBI’s inflation forecast remained unchanged at 6.7% for FY23, with RBI sounding cautious about the inflation trajectory despite the recent correction in crude prices. Das stressed the uncertain global backdrop, with aggressive monetary policy actions from global central banks emerging as a major global shock India was coping with after the pandemic and the war in Ukraine.

Das added that the bulk of the decline in forex reserves stems from a change in valuation and not because of intervention by RBI to defend the currency.

ABOUT THE AUTHOR

Gopika Gopakumar

Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
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