Spread the love
In yet another rate hike RBI increased the policy repo rate for the third time in a row concerning the inflationary pressure.
The Reserve Bank of India (RBI) Governor Shaktikanta Das-led Monetary Policy Committee increased the policy repo rate consecutively for the third time on August 5.
The incision of repo rate was formerly made by the RBI with an objective to prevent the impact of covid-induced lockdown, and maintained status-quo in the benchmark interest rate for almost two years before increasing it on May 4, 2022. It is to be noted that all the six members of the Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously voted for the latest rate hike.
Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra AMC in a statement said, “Inflation seems to be at the forefront of the move as they maintained CPI forecasts intact at 6.7% for FY 23. To us, this means we are not done with rate hiking cycle yet and we could brace for continued northward journey in rates. Withdrawal of accommodative stance has been maintained. We see this as a “no dovish" undertone policy contrary to markets expecting a dovish stance."
While announcing the monetary policy decision, RBI Governor Das said that the credit info companies will have their own internal tribunal system and a panel will be set up by the Central Bank in order to examine MIBOR benchmark alternatives.
While delivering a speech, Governor Das said that the Indian economy has been struggling with high inflation and also said that the country has been facing an outrush of $13.3 billion capital deficit since the past few months. He further added that the financial sector remains well capitalized and India's forex reserves provide insurance against global spillover.
The repo rate is the rate at which the RBI lends money to commercial banks. It is a tool to control inflation in the economy. It is when the inflation is more than the acceptable levels, the RBI increases the repo rate. Due to the increase of the repo rate, the home loan and other EMIs increase, lowering the demand and fluidity in the financial system.
At the same time, the reverse repo rate is the rate at which the commercial banks park their funds with the RBI. It is used to control cash flows in the market. It is also increased to encourage banks to park more and more funds with the Central bank, thus leaving less money for borrowing. Less money for borrowing means less demand. Less demand in turns translates into lower inflation.
Home loans and EMIs get costlier with the increase of these rates. The people who have opted for floating EMIs will have to shell out more money until the RBI decreases the rates. Last month, when the RBI increased the repo rate, major lenders like HDFC, SBI and Punjab National Bank had increased the EMIs of homeowners.
According to a report by the Indian Express, Dhiraj Relli, MD & CEO at HDFC Securities said, “The outcome of the MPC meet was in line with most of our expectations except that the repo rate hike came in at 50 bps vs 40 bps expected by us. RBI noted that inflation pressures have intensified and expects inflation to remain above the upper tolerance band of 6% for the first three quarters of FY23. The RBI hiked CPI inflation forecasts by 100 bps to 6.7% (vs earlier forecast of 5.7%). The MPC policy actions’ impact on inflation will only materialise after a couple of quarters.
The RBI governor has hoped for more fiscal measures from the Govt to bring inflation under control faster. While the real GDP growth projection for FY23 is retained at 7.2% based on the fact that drivers of domestic economic activity are getting stronger, they face headwinds from global spillovers in the form of protracted and intensifying geopolitical tensions, elevated commodity prices, COVID-19 related lockdowns or restrictions in some major economies, slowing external demand and tightening global financial conditions on the back of monetary policy normalisation in advanced economies.
This number may come up for some downward revision in the forthcoming MPC meets. The bond markets and equity markets reacted well to the MPC outcome being relieved that the MPC did not sound more hawkish than most expectations. Absence of a CRR hike also was a relief. Stock prices of rate sensitive sectors including Auto, Banks, Finance, Durables, Realty have reacted well to the MPC outcome due to the above. However, this up move may need more triggers to continue.
While a revisit of the pre Covid repo rate of 5.15% over the next 1-2 meets is a given (vs 4.90% currently), most economists expect this to go above 5.15%. A lot in this regard will depend on how soon the inflation peaks out and begins to fall and when do the global Central Banks feel that they are done with the rate hikes for now.”
ALSO READ: ASSAM KHADI BOARD CANNOT AFFORD TO MAKE FLAG FOR RS. 18
