RBI Hikes Interest Rate Again

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Loan EMIs are set to rise further after RBI on Friday raised the key interest rate by 50 basis points, the third straight increase since May. The increase in lending rate or the repurchase rate (repo) by 50 bps to 5.40 per cent is 25 bps higher than the pre-pandemic repo level. Reserve Bank of India Governor Shaktikanta Das signalled that the second straight half-point hike wasn’t the end of the rate tightening regime and more may come to tame inflation that has for six months stayed above the comfort zone of 6 per cent.

The central bank however did not revise its existing economic growth or inflation forecast despite indications of a global slowdown, recessionary conditions in the developed economies, and the moderation already witnessed in commodity prices.

“Inflationary pressures are broad-based and core inflation remains elevated. Inflation is projected to remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23, entailing the risk of destabilising inflation expectations and triggering second-round effects,” Das said.

RBI said the volatility in the global market is leading to imported inflation. The spillover from geopolitical shocks has resulted in uncertainty in the inflation trajectory. Global commodity, metal and food prices have eased from recent peaks, however, they still remain elevated. On the domestic front, higher sowing of kharif crops bodes well for the food price outlook. The shortfall in paddy sowing is being monitored closely, even though rice stock remains above buffer norms.

Since May, the central bank has cumulatively raised interest rate by 140 bps in its effort to contain inflation. Despite this sharp hike, RBI expects inflation to remain above its comfort zone and has retained CPI inflation forecast at 6.7 per cent for current fiscal year. RBI expects India’s GDP growth to remain strong at 7.2 per cent in FY23.

The central bank surprised markets 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. The latest increase mirrors the US Federal Reserve-led global tightening of interest rates to rein in spiralling prices, caused by supply snarls and energy price shocks following Russia’s invasion of Ukraine.

The monetary policy committee (MPC) believes “calibrated withdrawal of monetary policy accommodation is warranted to keep inflation expectations anchored and contain the second-round effects,” Das said. On the rupee depreciating against the US dollar, he said at a 4.7 per cent decline, the rupee fared much better than several reserve currencies as well as many of its EME and Asian peers.

“The depreciation of the Indian rupee is more on account of the appreciation of the US dollar rather than weakness in macroeconomic fundamentals of the Indian economy. Market interventions by the RBI have helped in containing volatility and ensuring the orderly movement of the rupee,” he said. Das said the RBI will remain watchful and maintain the stability of the rupee.

The Indian economy has been impacted by the global economic situation and is grappling with the problem of high inflation. “Nevertheless, with strong and resilient fundamentals, India is expected to be amongst the fastest growing economies during 2022-23 according to the IMF, with signs of inflation moderating over the course of the year,” he said.

(Additional Input from PTI)

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IE&M Team
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