For the second time in six weeks, the Reserve Bank of India on Wednesday hiked the interest Rate — this time by 50 basis points. This would tame inflation but pave the way for rise in home, auto and other loan EMIs.
Haunted by the spectre of inflation which has sustained around 6 per cent mark— way above the RBI’s comfort level — the six-member monetary committee of the central bank unanimously voted to raise the lending rate by 50 basis points to 4.90 per cent, Governor Shaktikanta Das said.
The increase follows a 40 bps rise in early May at an unscheduled meeting that kicked off the central bank’s tightening cycle.
The rate hike on May 4 and on Wednesday comes after 11 consecutive times of the RBI holding interest rate at a record low of 4 per cent. The RBI cut the repo rate by 250 basis points since February 2019 to help revive the growth momentum. This included a 115 bps cut between March 2020 and May 2020 to soften the blow from the Covid crisis.
The Reserve Bank has the mandate to keep retail inflation at 4 per cent with a bias of 2 per cent on either side. However, retail inflation has been above 6 per cent for the last four months in a row, rising to as high as 7.8 per cent in April.
Addressing a Press conference, Das said the RBI has changed the policy stance to drop the phrase “remains accommodative”, and instead opted for “withdrawal of accommodation” for guiding its future moves.
The central bank did not hike the cash reserve ratio contrary to speculation, he said, adding that the liquidity withdrawal will be calibrated and measured. He assured that adequate liquidity will be available for banks to lend for economic growth.
The Indian economy continues to be resilient and is well placed to deal with challenges emerging from the global worries and will be supported by a banking system having strong capital buffers, low non-performing assets and higher provisioning coverage, Das said.
The RBI’s main concern seems to be in ensuring that the inflation did not spiral out of control. The rise in interest rate will discourage borrowing that would impact on availability of liquidity. However, Das said withdrawal of accommodation will be done in a way that growth will continue to get adequate support.
Das mentioned that even after the hikes, the policy rate is below the pre-pandemic level of 5.15 per cent.
The Monetary Policy Committee (MPC) raised its inflation forecast for the current fiscal (April 2022 to March 2023) to 6.7 per cent from April prediction of 5.7 per cent but retained its economic growth projection at 7.2 per cent. “Inflation has steeply increased beyond the upper tolerance level,” Das said announcing the policy decisions. “Upside risks to inflation as highlighted in last policy meetings have materialised earlier than expected.”
Inflation will likely remain above the RBI’s upper tolerance band until December, he said, adding that 75 per cent of the increase in inflation forecast is on account of a spike in food prices which are due to war in Ukraine.
The rate hike on May 4 and on Wednesday comes after 11 consecutive times of the RBI holding interest rate at a record low of 4 per cent.
“We believe that more rate hikes are likely in the next 2-3 policy meetings given that RBI has revised its headline inflation forecast sharply upwards,” d Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, told news agency PTI.
“However, the extent of the subsequent hikes will depend on the inflation print over the next few months, the performance of the monsoon and its impact on the food prices as also on the effectiveness of the price control measures taken by the Government.”
The war in Europe is accentuating the existing supply chain disruptions, resulting in elevated food, energy and commodity prices. “The war has led to globalisation of inflation,” he said.
