BENGALURU (Reuters) – The Reserve Bank of India’s key interest rate was raised by 50 basis points on Wednesday as widely expected, in the second hike in as many months, in a bid to cool persistently high inflation.
The monetary policy committee (MPC) raised the key lending rate or the repo rate by 50 basis points (bps) to 4.90%.
The Standing Deposit Facility rate and the Marginal Standing Facility Rate were adjusted higher by the same quantum to 4.65% and 5.15%, respectively.
COMMENTARY
KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU
“The central bank stuck to its revised playbook of targeting inflation. For sure, multiple challenges are staring at the central bank’s face — sharply higher inflation, rising bond yields, and weak growth prospects. Yet, the RBI rightly chose to address inflation despite knowing fully well that immediate supply-side challenges can barely be addressed by monetary policy. At this point in time, therefore, it is critical for the RBI to raise rates sufficiently to engineer a growth slowdown to check potential passthrough of high input costs to output prices as the long-term economic cost of unaddressed inflation would be far more damaging. Yet, the RBI’s projections show that inflation will only ease at a rather slow pace and would continue to remain well above the RBI’s upward tolerance limit of 6.0%.”
SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI
“The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to marginally positive real policy rate. We expect 35 bps repo rate hike in the August policy to 5.25% and repo rate at 5.75% by end-FY2023. Along with pushing the repo rate to above the pre-pandemic level, a 35 bps hike would also signal a gradual normalization in the policy actions while being adequately hawkish. We also expect another 50 bps hike in CRR to 5% by end-FY2023 to move the liquidity conditions towards the pre-pandemic levels.”
AURODEEP NANDI, INDIA ECONOMIST AND VICE PRESIDENT, NOMURA, MUMBAI
“Today’s hike by 50 bps on top of an inter-meeting 40 bps hike in May is reflective of inflation elbowing its way to the top of the RBI’s priority list and it belatedly looking to catch up with the curve. The RBI’s upward revision of the inflation forecast for FY23 to 6.7% from 5.7% in April was also in line with our expectations, but still lower than our forecast of 7.2%. So, we believe that we are still far from the finishing line and that more front-loaded rate hikes are on the offing.”
PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI
“Including today’s rate hike, the RBI has raised effective policy rate by 155 bps this year through a series of rate hikes and liquidity tightening measures — i.e. from 3.35% reverse repo to revised 4.90% repo rate. We expect peak repo rate in the current tightening cycle at 6% given that CPI inflation is likely to average 5% to 5.5% in 12 to 18 months from now.”
ADITI NAYAR, CHIEF ECONOMIST, ICRA, GURUGRAM
“While further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9% remaining below the pre-pandemic level, the comment on the orderly completion of the government borrowing programme has served to cool the 10-year G-sec yield. We foresee further repo hikes of 35 bps and 25 bps, respectively, in the next two policies.”
(Reporting by Tanvi Mehta and Nallur Sethuraman in Bengaluru; editing by Uttaresh.V)
