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RBI hikes repo rate to 4.90%, retains FY23 GDP growth at 7.2%

Repo rate is the rate at which the banks borrow from the RBI. Higher repo rate would make loans expensive for borrowers, adding to their EMI burdens.

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Mumbai:  As widely expected, the Reserve Bank of India (RBI) on Wednesday hiked policy repo rate by 50 basis points (bps) to 4.90 per cent with immediate effect.

Repo rate is the rate at which the banks borrow from the RBI. Higher repo rate would make loans expensive for borrowers, adding to their EMI burdens.

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The Monetary Policy Committee (MPC) or rate-setting panel’s decision has come close on the heels of increase in repo rate by 40 basis points in an off-cycle meeting in May.

Making monetary policy statement, RBI Governor Shaktikanta Das said that the MPC voted unanimously to increase the policy repo rate.

Following the hike in repo rate, the standing deposit facility (SDF) rate stands adjusted to 4.65 per cent and the marginal standing facility (MSF) rate and bank rate to 5.15 per cent.

“The MPC also decided to unanimously remain focussed on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth,” the Governor said.

Das noted that the war in Europe is lingering and the economy is facing newer challenges with each passing day which is accentuating supply chain disruptions.

Amid the elevated inflation, crude price volatility and geo-political crisis, economists and market-watchers had expected RBI to hike repo rate in the range of 25-50 basis points.

Governor Das had earlier hinted that more rate hikes were in the pipeline, saying that expectations of increase in the repo rate was a ‘no-brainer’.

In what seems a co-ordinated action, the government had last month slashed excise duty on diesel and petrol to provide relief to people from rising prices of essentials. It also calibrated duties on raw materials of steel to cool down prices of steel for the local industry.

Both retail and wholesale inflations have surged adding to the woes of common man. The consumer price index (CPI)-based inflation had touched eight-year high of 7.79 per cent in April, 2022. The wholesale price index (WPI)-based inflation has been in double digit for nearly a year now.

The RBI is tasked to maintain price stability and keep retail inflation in the range of 2-6 per cent.

While inflationary pressure is expected to continue posing risks to economic growth, the RBI has retained GDP growth projection for 2022-23 at 7.2 per cent with Q1 growth at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4.0 per cent, with risks broadly balanced.

“Since the RBI continues to forecast strong growth, it is very likely that it delivers another 25 bps hike on 4th of August before it takes a pause. Our fear is that growth could see a serious deceleration in H2FY23 and FY24 on the back of such steep tightening and structural constraints,” said Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services.

In its assessment of the economy and outlook, the RBI said that consequent to the recent reduction in excise duties, domestic retail prices of petroleum products have moderated while noting that international crude oil prices remain elevated with risks of further pass-through to domestic pump prices.

The central bank further said that there are also upside risks from revisions in the prices of electricity. Also, early results from manufacturing, services and infrastructure sector firms polled in the Reserve Bank’s surveys expect further input and output price pressures going forward.

“Taking into account these factors, and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 105 per barrel, inflation is now projected at 6.7 per cent in 2022-23, with Q1 at 7.5 per cent; Q2 at 7.4 per cent; Q3 at 6.2 per cent; and Q4 at 5.8 per cent, with risks evenly balanced,” the RBI said.

In his post-monetary policy press conference, RBI Governor said that 75 per cent of the increase in the inflation projection for FY23 is on account of food inflation.

The RBI Governor noted that considerable uncertainty surrounds the inflation trajectory due to global growth risks and geopolitical tensions and added that supply side measures taken by the government would help to alleviate some cost-push pressures.

“At the same time, however, the MPC notes that continuing shocks to food inflation could sustain pressures on headline inflation,” said RBI monetary policy statement.

Commenting on the monetary policy statement, ICRA Chief Economist Aditi Nayar said that while further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9 per cent 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. However, the upmarch in the yields will now be somewhat shallower than our earlier expectations,” she said.

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