RBI Repo Rate News: RBI raises repo rate by 50 bps to 5.4%

The Reserve Bank of India-led Monetary Policy Committee on Friday increased the repo rate by 50 basis points to 5.4% to take it to the pre-pandemic levels, as the monetary authority seeks to bring down inflation to its comfort band and in line with policy tightening by key central banks.

The Standing Deposit Facility (SDF) rate was adjusted to 5.15%, meanwhile, the Marginal Standing Facility and bank rate were revised to 5.65%. “The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” said RBI governor Shaktikanta Das.

The policy rate increase by the MPC comes as an attempt to curtail the inflationary pressures faced by citizens on the back of high food and fuel prices following supply disruptions due to Russia’s invasion of Ukraine. The increase also comes after the Indian rupee’s plunge to an all-time low in July that further bumped up imported inflation.

While talking about the rate hike, Dr. Aurodeep Nandi, India Economist and Vice President at Nomura, said “The RBI’s 50bp hike was largely in line with market expectations, that was divided between it and a 35bp hike. Very importantly, with the RBI retaining the policy stance of “withdrawal of accommodation”, the implicit message is that rates are yet to reach neutral territory, and that more rate hikes are warranted – a view that we agree with. The RBI continues to signal that all options are on the table, which is a prudent strategy given the elevated levels of uncertainties on both, growth as well as inflation.”

Edelweiss, BofA and had speculated a 35-50 basis points hike, Meanwhile, a Reuters poll of 63 economists had suggested a rate increase in the range of 25-to-50 bps. A recent ET poll of 22 participants also showed that more than half the respondents that included bankers, traders, analysts and fund managers expect RBI to change its stance to ‘neutral’ from ‘accommodative.

The Reserve Bank had increased the key rate by 90 basis points since May, including a 50-basis-point hike in June this year.

During the June policy, Das had said that price rise is much beyond the tolerance level, while he recently suggested that inflation will ease in the fiscal second half and has peaked. However, he also underscored the volatile nature of the inflation pressures.

Retail inflation in India had eased to 7.01% in June, but the print stayed over the RBI’s tolerance ceiling of 6% for the sixth consecutive month. Consumer prices in India had surged to an eight-year high at 7.80% in April. The wholesale inflation has been in the double-digit for 15 consecutive months.

In coming months, economists see the peak policy rate, or what’s usually referred to as the terminal rate, to be reached earlier than expected in the cycle. Barclays now sees the policy rate rising to 5.50% by September from a prior forecast of mid-2023. That will signal that rates have reached neutral territory, its India-based economist Rahul Bajoria said, referring to a level where rates can help check inflation without stifling economic growth. He kept his projection for the terminal rate at 5.75%.

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