For the third time in a row, the Reserve Bank of India’s monetary policy panel increased interest rates by 50 basis points. Joining a long line of central banks that have done the same to combat the consequences of a surging currency and rising costs.
The RBI’s repo rate is currently 5.9%, bringing the total number of rate increases since May to 190 bps. The rate hike was in line with what each of the 10 economists surveyed by Mint had predicted.
The RBI’s repo rate is at 5.9%, making 190 basis points (bps) worth of rate rises since May. The rate increase was in line with the predictions made by each of the 10 economists surveyed by Mint.
According to RBI governor Shaktikanta Das, two factors—inflation and growth—guide the MPC’s decisions. “The MPC does not take into consideration changes in the currency markets. Such as the appreciation or depreciation of the rupee. RBI has additional tools for handling these circumstances that will be used as needed, according to Das.
In order to counteract rising inflation and the impact of a strong currency on their economies. Central banks are hurriedly raising interest rates. This is happening as the US Federal Reserve keeps up its aggressive rate hike schedule. The persistent rise of the dollar, the world’s reserve currency. Promotes inflation and stunts economic growth in nations that rely heavily on imports of food and energy.
The RBI is also dealing with persistently high inflation, which is made worse by supply-chain disruptions, droughts, and geopolitical unrest.
“The fact that RBI kept the policy stance unchanged as ‘withdrawal of accommodation. Indicates the door is open for a further hike in the policy repo rate. The terminal rate expectation in the bond market has moved up to 6.5%,” said Pankaj Pathak. Fund manager-fixed income, Quantum AMC. “Aggressive monetary tightening in advanced economies will continue to weigh on domestic monetary policy. It would be difficult for RBI to soften its stance in such a hostile global environment. Over the last few months, declining banking system liquidity has put upward pressure on short-term money market rates. However, RBI seems comfortable with prevailing liquidity conditions, and there was no indication of durable liquidity infusion at this stage.”
In the press conference following the policy announcement, Das avoided giving any commitments on the level of operating rates, real interest rates, or liquidity that might at this point lead to a shift in posture.
MPC believed that continued high inflation required a further, carefully timed removal of monetary accommodative measures in order to limit the spread of price pressures, stabilise inflation expectations, and limit the impacts of a domino effect. This will enhance the prospects for medium-term growth, according to Das.
Following the RBI’s policy decision, stocks increased. BSE Sensex closed at 57,426.92, up 1.8%. The benchmark 10-year bond’s yield increased to 7.4%. While keeping its inflation forecast unchanged, RBI slightly lowered its growth outlook as well. The FY23 growth prediction was decreased from 7.2% to 7%. However, despite the fact that the growth in the June quarter was less than anticipated, RBI is still optimistic about future growth.
Despite the recent drop in petroleum prices, the RBI maintained its 6.7% FY23 inflation prediction while expressing cautious about the inflation trajectory. Das emphasised the unstable nature of the world’s economy, with aggressive monetary policy moves by central banks around the world emerging as a significant global shock that India was grappling with in the wake of the pandemic and the war in Ukraine.
Das went on to say that rather than the RBI intervening to protect the currency, the majority of the fall in FX reserves is the result of a shift in value.