RBI hikes repo rate by 50 basis points to 4.90% to tame inflation; EMIs set to go up
RBI's decision to raise the interest rate is aimed at doubling down the fight to contain inflation that has surged in the last couple of months.
RBI Repo Rate Hike News: The Reserve Bank of India (RBI) on Tuesday hiked the benchmark lending rate by 50 basis points as inflation continues to remain above its comfort level. One basis point is one-hundredth of a percentage point. Accordingly, the repo rate now stands at 4.90 per cent.
Addressing the media, RBI Governor Shaktikanta Das informed that all the six members of the Monetary Policy Committee (MPC) unanimously voted for the latest rate hike, adding that repo rate remains below the pre-pandemic level.
The repo rate is the rate at which the central bank lends money to commercial banks while the CRR is a certain minimum amount that banks have to deposit as reserves with the central bank.
Last month, the six-member Monetary Policy Committee led by Das in an off-cycle monetary policy review had raised the repo rate or short term lending rate by 40 basis points to check spiralling inflation. It was the first rate hike after August 2018. The central bank had also hiked cash reserve ratio (CRR) by 50 basis to 4.50 per cent.
State Bank of India chairman Dinesh Khara pointed out that rate hike was linked to present uncertainties facing the world.
"Uncertain times demand unconventional measures. Owing to persisting global uncertainties, RBI has hiked rates by 50 basis points and revised the inflation projection to 6.7 percent. The policy statement is a comprehensive assessment of uncertainties and is an affirmation of coordinated policy action by the Government and RBI to thwart the dangers of inflation. Enabling more headroom for Urban and Rural Cooperative Banks for financing the housing sector will bring about a level playing field in the cooperative banking space. Linking Rupay credit cards to UPI will add more avenues and convenience to customers," Khara said.
Rajiv Shastri, director and CEO, NJ AMC, said that the MPC's actions are in line with the minutes of their previous meeting and indications thereafter. Higher rates are expected to moderate consumer demand, which may prevent higher producer prices from being passed on to customers going forward.
"However, this may squeeze corporate profits in the immediate term as they grapple with higher input prices and low demand from their consumers. Fiscal initiatives by the government may be needed to compensate for lower private consumption and sustain GDP growth at expected levels, which may result in higher government borrowings in the near term," he said.
"Most industries are already facing headwinds due to steep increase in raw materials cost and fuel prices and a hike in the rates will further increase the burden. The Fed is also increasing the rate so there is a major possibility that apart from the equity market, other markets like the debt market and bond market may see some outflow anytime soon," Ravi Singh, vice president and head of research, Share India, said.
Inflation
Das said that the war in Ukraine has led to the globalisation of inflation, adding that "our steps will be calibrated, focussed on bringing down inflation to target level".
"Inflation is likely to remain above 6 per cent in the first three quarters of current fiscal," the RBI Governor said.
The Consumer Price Index (CPI) based inflation, which RBI factors in while arriving at its monetary policy, is on the rise since October 2021. Retail inflation has remained above RBI's upper tolerance level of 6 per cent since January. It had soared to an 8-year high of 7.79 per cent in April.
The government has tasked the central bank to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side.
"This is a move that has come as a no-brainer since the bank has attributed the current scenario to tensions between Russia & Ukraine along with currency depreciation & high supply shock," Ridhima Kansal, director, Rosemoore, said.
With an aim to cushion the impact of lockdown, RBI had slashed the repo rate by 75 basis points to 4.40 per cent in March 27, 2020 from 5.15 per cent. On May 22, 2020, RBI again cut the repo rate by 40 basis points and brought it down to 4 per cent. Thereafter, it maintained status-quo in the benchmark interest rate for almost two years before increasing it on May 4, 2022.
RBI retains growth projection at 7.2%
The RBI retained its growth projection at 7.2 per cent for the current fiscal on the back of improvement in urban demand and gradual recovery in rural India. Das said the Indian economy remained resilient, and the central bank will continue to support 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.
The central bank earlier in April slashed the GDP growth projection for 2022-23 to 7.2 per cent from its earlier forecast of 7.8 per cent.
READ MORE: How RBI rate hike will tame inflation? Explained