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The Reserve Bank of India (RBI) has hiked the key interest rate by 50 basis points, the second increase in five weeks, to tame inflation. The increase in lending rate or the repurchase rate (repo) by 50 bps to 4.90 per cent was the biggest in more than a decade and came on the back of a 40 bps hike in May at an unscheduled meeting that kicked off the tightening cycle.

The RBI’s six-member Monetary Policy Committee (MPC), which met from May 6-to 8, unanimously voted to increase the policy repo rate to 4.90 per cent. RBI Governor Shaktikanta Das said the MPC’s decision to increase the repo rate by 50 basis points (bps) and focus on withdrawal of accommodation are calibrated to the evolving inflation-growth dynamics.

WILL THIS HELP?

Along with a hike in the repo rate, the RBI also revised upwards its inflation projection to 6.7 per cent for the financial year 2022-23 from an earlier projection of 5.7 per cent made in April.

Das said around 75 per cent increase in the inflation projection is attributed to food inflation.

“By and large, if you look at it (inflation), excepting factors like tomato prices slightly going up or some domestic electricity tariff being revised up by some states, primarily the food inflation spike is linked to external factors, namely the war in Europe,” Das said.

The governor said the forecast on inflation is the baseline scenario without factoring in the steps taken by the RBI.

“We believe that our actions will have their impact in bringing down inflation and inflation expectations. Our endeavour will be to move closer to the target and the target is 4 per cent, plus/minus 2 per cent on either side. So that target of 4 per cent does remain,” he said.

On a query on whether RBI will continue to be aggressive in terms of the quantum rate hike, given the higher inflation projection, Das said, “Our future action will depend on the evolving inflation-growth dynamics. The situation is fast-changing and it (rate action) will depend on how the situation evolves”.

CHALLENGES BEFORE INDIA

Chief Economic Advisor (CEA) Anantha Nageswaran said this year India will be facing challenges of managing a sustainably high growth, moderating inflation, keeping fiscal deficit under balance and also ensuring that the external value of the Indian rupee remains same.

However, the impact of structural reforms, like Goods and Service Tax (GST) and IBC, will help boost India’s growth once the cloud of the pandemic and geopolitical conflict recedes, Chief Economic Advisor (CEA) Anantha Nageswaran said on Wednesday.

EXPERTS’ TAKE

“The MPC’s actions are in line with the minutes of their previous meeting and indications thereafter. Higher rates are expected to moderate consumer demand, which may prevent higher producer prices from being passed on to customers going forward. However, this may squeeze corporate profits in the immediate term as they grapple with higher input prices and low demand from their consumers,” said Rajiv Shastri, Director, and CEO, NJ AMC.

“Fiscal initiatives by the government may be needed to compensate for lower private consumption and sustain GDP growth at expected levels, which may result in higher government borrowings in the near term. However, there are some indications that global prices may moderate soon which may allow for a pause sooner rather than later,” Shastri said.

“Interest rates are on the rise on back of persistent inflation and a moderate RBI policy of raising rates and easy liquidity. Banks will gradually raise rates and that will lead to higher EMIs. There could be temporary periods where for competitive reasons, low interest rates could be offered on loan products. Such conditions cannot be expected to last for long,” said Sandeep Bagla, CEO, Trust MF.

“With inflation expected to remain above the RBI’s mandate through FY23, we expect the MPC to hike policy repo rate by an additional 40 bps this fiscal year and target a terminal repo rate of 6.25 per cent in the current hike cycle,” said Garima Kapoor, Economist, Institutional Equities, Elara Capital.

“Gradual tightening of domestic liquidity conditions, elevated crude oil prices, tightening of global financial conditions, and risks of overshooting of FY23 fiscal deficit are likely to put incremental pressure on the domestic bond yields. We expect 10-year bond yield to gradually move towards 8 per cent over the next four to six months,” Kapoor said.

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India today