The Reserve Bank of India’s monetary policy committee (MPC) in its June meeting hiked the repo rate for a second straight month and stated that it would now focus on withdrawal of accommodation while dropping all mention of an accommodative stance from its script.
The MPC unanimously raised the repo rate by 50 basis points to 4.9% — the biggest increase in more than a decade.
RBI governor Shaktikanta Das admitted that the rate-setting panel was set to fail in its mandate, with inflation overshooting the upper bound of its target range of 2-6% for three quarters in a row. “Inflationary pressures have become broad-based and remain largely driven by adverse supply shocks. There are growing signs of a higher pass-through of input costs to selling prices,” Das said on Wednesday, adding: “The MPC noted that inflation is likely to remain above the upper tolerance band of 6% through the first three quarters of 2022-23.”
The MPC raised its inflation projection for FY23 to 6.7% from 5.7% earlier. Das took care to highlight that around 75% of the increase in inflation projections can be attributed to the food group which, in turn, is being influenced by external factors. “Further, the baseline inflation projection of 6.7% for 2022-23 does not take into account the impact of monetary policy actions taken today,” he said.
The MPC held on to its April assessment of economic growth for FY23 and retained its projection for real gross domestic product (GDP) growth at 7.2%, with Q1 at 16.2%, Q2 at 6.2%, Q3 at 4.1% and Q4 at 4%.
Surplus liquidity in the system remains above pre-pandemic levels, Das said. He sought to assuage concerns about the pace of liquidity withdrawal, saying that the process will be a calibrated one, taking care of the credit needs of the economy. “Given the elevated uncertainties of the current period, we have remained dynamic and pragmatic rather than being bound by stereotypes and conventions,” he added.
Many experts expect rate hikes to continue in the months ahead, with the RBI keen on shoring up its credentials as an inflation fighter.
Pranjul Bhandari, chief India economist at HSBC, wrote: “We expect the repo rate at 6% by mid-2023. Our medium-term inflation forecast is 5.5%, and a 6% repo rate will imply a 0.5% real repo rate, close to our estimate of 0.5-1% neutral real rates for the economy.”
A reassurance from Das on the orderly completion of the government’s borrowing programme soothed nerves in the markets. During the post-policy press conference, Das said the RBI currently holds adequate securities to carry out an Operation Twist (OT), should the need for it arise.
The yield on the benchmark 10-year government security dropped intraday to 7.431% and ended at 7.494%, 2 bps lower than its previous close.
Abheek Barua, chief economist, HDFC Bank, warned that the relief rally in bond yields may only be temporary. “With elevated oil prices and rising global yields, this rally is likely to be short-lived and yields could march north yet again,” Barua said, adding that the policy rate may be raised well beyond the pre-pandemic level to close to 6% by end-FY23.
The absence of a hike in the cash reserve ratio (CRR) meant that bankers could also breathe easy. Citi India CEO Ashu Khullar said, “RBI’s decisive and continued commitment to manage inflation further builds upon India’s resilience amidst the global headwinds. India’s growth path will be nurtured through these calibrated policies, opening up many opportunities on the way.”
Being largely in line with market expectations, Wednesday’s rate action has given others better visibility on an end to the current tightening cycle. Rahul Bajoria, MD & chief India economist at Barclays, said: “As today’s policy outcome was broadly along expected lines, we think this sends a very strong signal that the central bank no longer feels the need to go beyond market expectations in delivering rate hikes.” Bajoria expects the MPC to take the repo rate to 5.75% by December, which would mark the end of the current cycle.
Lenders, too, are relatively optimistic about the future course of rate hikes. Umesh Revankar, vice-chairman & MD at Shriram Transport Finance, said that the regulator may not hike rates very aggressively hereon. “While surplus system liquidity has come down, the RBI has said they will ensure adequate system liquidity for productive purposes. As a result, we do expect borrowing costs to go up gradually,” he said.
The RBI also proposed to link credit cards to UPI platforms, beginning with RuPay cards. At present, UPI facilitates transactions by linking savings or current accounts through users’ debit cards. Das said the new arrangement is expected to provide more avenues and convenience to the customers in making payments through UPI platforms.
In order to deepen credit flow to the housing sector, Das said that the cooperative banks will now be able to lend more for home loans. This will ensure better credit flow in the residential housing sector.
