Shaktikanta Das,Governor,Reserve Bank of india
This is the third consecutive rate hike after a 40 basis points in May and 50 basis points increase in June. In all, the RBI has raised benchmark rate by 1.40 per cent since May this year
“With growth momentum expected to be resilient despite headwinds from the external sector, monetary policy should persevere further in its stance of withdrawal of accommodation to ensure that inflation moves close to the target of 4% over the medium term, while supporting growth,” RBI Governor Shaktikanta Das said in his address
Mumbai:
On expected lines, the Reserve Bank of India (RBI) on Friday raised the benchmark lending rate by 50 basis points to 5.40 per cent to tame inflation.
With the latest hike, the repo rate or the short term lending rate at which banks borrow has crossed the pre-pandemic level of 5.15 per cent.
This is the third consecutive rate hike after a 40 basis points in May and 50 basis points increase in June. In all, the RBI has raised benchmark rate by 1.40 per cent since May this year.
All the six members of the Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously voted for the rate hike.
The MPC retained its GDP growth projection for 2022/23 at 7.2% while its inflation forecast remained unchanged at 6.7%.
“Inflation is projected to remain above the upper tolerance level of 6% through the first three quarters of 2022-23, entailing the risk of destabilising inflation expectations and triggering second round effects,” the MPC said in its statement.
“With growth momentum expected to be resilient despite headwinds from the external sector, monetary policy should persevere further in its stance of withdrawal of accommodation to ensure that inflation moves close to the target of 4% over the medium term, while supporting growth,” RBI Governor Shaktikanta Das said in his address.
Das said the decision to increase rates was a unanimous one.
RBI retained its growth projection at 7.2 per cent for the current fiscal as it sees improvement in urban demand and gradual recovery in rural India aided by normal monsoon.
Das said the central bank remains committed to price stability to put the country on the sustained path of growth.
The RBI expects growth in the first quarter of the current fiscal at 16.2 per cent, which will taper to 4 per cent by the fourth quarter.
Das, however, cautioned that there are risks from the ongoing Russia-Ukraine war. The central bank in April slashed the GDP growth projection for 2022-23 to 7.2 per cent from its earlier forecast of 7.8 per cent.
Surplus liquidity in the banking system has come down to Rs 3.8 lakh crore, from Rs 6.7 lakh crore in April-May: Das.
The Standing Deposit Facility rate and the Marginal Standing Facility Rate were adjusted higher by the same quantum to 5.15% and 5.65%, respectively.
The Consumer Price Index (CPI) based inflation, which RBI factors in while fixing its benchmark rate, stood at 7.01 per cent in June. Retail inflation has been ruling above the RBI’s comfort level of 6 per cent since January this year.
Inflation based on the Wholesale Price Index (WPI) remained in double-digit for 15 months in a row. The WPI reading was at 15.18 per cent in June.
The RBI caught markets off guard with a 40 bps hike at an unscheduled meeting in May, followed by a 50 bps increase in June, but prices have shown little sign of cooling off yet.
With inflation staying elevated more rate hikes are all but inevitable in coming months, economists say.
RBI policy was hawkish and the MPC delivered a frontloaded 50 bps rate hike compared to market expectations of 35-40 bps hike. The RBI mentioned that the domestic economic activity is showing signs of broadening with improving credit growth, pick-up in investment activity and rising capacity utilization. However, risks like geo political concerns and global financial market volatility and tightening financial conditions will weigh heavily on the outlook,” said Sampath Reddy, CIO, Bajaj Allianz Life Insurance.
“The RBI today raised the repo rate by 50 bps to 5.40% as we had anticipated, and struck a relatively hawkish tone despite inflation surprising to the downside in recent months,” said Shilan Shah, senior India economist at Capital Economics.
“It’s clear that the tightening cycle still has legs and we expect another 100 bps of hikes by early 2023,” he added.
Spiking pricesfor food and fuel have hammered consumer spending and darkened the near-term outlook for India’s economic growth, which slowed to the lowest in a year in the first three months of 2022.
The benchmark 10-year bond yield climbed after the RBI’s decision and was at 7.25% at 0600 GMT. It had declined to 7.1073% earlier on Friday after ending at 7.1566% on Thursday.
The partially convertible rupee firmed slightly to 79.0675 per dollar, from 79.16 prior to the policy decision. The local unit had closed at 79.4650 in the previous session.
The latest RBI action follows the Bank of England raising rate by 50 basis points, the biggest hike in 27 years, to 1.75 per cent.
Last month, the US Federal Reserve effected its second consecutive 0.75 percentage point interest rate increase, taking its benchmark rate to a range of 2.25-2.5 per cent.