PremiumRBI Monetary Policy: As expected, the Reserve Bank of India (RBI) Governor Shaktikanta Das-led Monetary Policy Committee (MPC) hiked the policy repo rate for the third time in a row on Friday, in order to tame the inflationary pressure. RBI had slashed the repo rate in March, 2020 with an aim to cushion the impact of covid-induced lockdown, and maintained status-quo in the benchmark interest rate for almost two years before increasing it on May 4, 2022.
“Despite this sharp hike, RBI expects the inflation to remain above its comfort zone and has retained its CPI inflation forecast at 6.7% for FY23. We believe, the commodity prices have cooled off including crude oil, the inflation may be peaking out. We expect RBI may not be very aggressive in its subsequent policy meets and being more data driven based on inflation numbers," said Motilal Oswal, MD & CEO, Motilal Oswal.
“Inflation seems to be at the forefront of the move as they maintained CPI forecasts intact at 6.7% for FY 23. To us, this means we are not done with rate hiking cycle yet and we could brace for continued northward journey in rates. Withdrawal of accommodative stance has been maintained. We see this as a “no dovish" undertone policy contrary to markets expecting a dovish stance," said Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra AMC.
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“The MPC decisions have been in line with our expectations. Given the increasing external sector imbalances and global uncertainties the need for frontloaded action was imperative. We continue to see 5.75% repo rate by Dec 2022," said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
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Surplus liquidity in the banking system has come down to ₹3.8 lakh crore, from ₹6.7 lakh crore in April-May, said Das, adding that rise in term deposit rates should increase liquidity for financial sector.
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Consumer price index (CPI) inflation remains uncomfortably high and isexpected to remain above 6%: RBI Governor.
CPI forecast for FY23 kept unchanged at 6.7% on assumption of normal monsoon and crude oil at USD 105/barrel
CPI inflation for Q1- 2023-24 is projected at 5%
The RBI has retained its FY23 gross domestic product (GDP) growth forecast at 7.2%.
The real GDP growth projection for 2022-23 is retained at 7.2% with Q1- 16.2%, Q2- 6.2%, Q3 -4.1% and Q4- 4% with risks broadly balanced: RBI Governor Shaktikanta Das
Governor further announced that the policy stance is retained at Withdrawal of Accommodation to check inflation
The Standing Deposit Facility rate and the Marginal Standing Facility (MSF) Rate were accordingly adjusted higher by the same quantum to 5.15% and 5.65%, respectively.
RBI has hiked repo rate by 50 bps to 5.40% with immediate effect. Repo rate is now back to pre-pandemic levels, highest since August 2019
If the RBI chooses to hike the policy repo rate on Friday, it will be the third hike in a row. The repo rate is the rate at which the central bank of a country lends money to commercial banks.
Even after the two consecutive hikes, the repo rate remains at below pre-pandemic level. With today's expected hike, the market is expecting the RBI to take policy rates to at least pre-pandemic levels.
Experts believe that RBI is also likely to revise its inflation forecast upwards and growth forecast downwards alongside rate hike. In June policy, RBI decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.
According to HDFC Bank's Chief Economist Abheek Barua, the RBI is "likely to take rates above a level deemed 'neutral' (which we think is closer to 5.25 per cent) before slowing down or looking at becoming more data dependent in this rate hike cycle."
Sensex, Nifty edged higher ahead of an expected rate hike, led by financials. Sensex was up over 200 points in opening deals
Indian government bond yields dropped on Friday, with the 10-year yield trading at a three-month low, after global oil prices fell overnight, while market participants await RBI's policy decision for further cues.
India's consumer price index (CPI) inflation currently is at 7.01% in June 2022 after peaking at 7.79% in April. The inflation has stayed above RBI's upper limit of 6% for the sixth consecutive month.
The rupee rose ahead of monetary policy decision on Friday as the currency opened at 79.15 against the US dollar, supported by overnight weakness in oil prices and the dollar.
The RBI is widely expected to increase the key interest rate, though, experts remain divided over the quantum of the hike, with views widely split between 25 basis points (bps) and 50 basis points.
The six-member Monetary Policy Committee headed by the RBI Governor Shaktikanta Das started deliberations on the bi-monthly policy review on Wednesday.
The RBI has raised the repo rate by 90 basis points to 4.90% since embarking on a tightening cycle at an unscheduled policy meeting in May, to curb inflationary pressures.
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