RBI Repo Rate Hike: In an unexpected move the Reserve Bank of India came up with announcement that will have a great and long term effect on the people! RBI Governor Shaktikanta Das has said that the Monetary Policy Committee’s off-cycle meet had unanimously voted to hike rates. The rationale behind this decision was the upside risks posed by global factors to India’s inflation trajectory.
The repo rate now stands at 4.40%, with immediate effect. Consequently, the standing deposit facility rate stands adjusted to 4.15%. Meanwhile, the marginal standing facility rate and the Bank Rate stand adjusted to 4.65%.
However, the Monetary Policy Committee has decided to remain accommodative while focusing on the withdrawal of accommodation. This is aimed at ensuring that inflation remains within the target going forward, while supporting growth.
Driven by food inflation, the headline inflation number in March had touched 7%. And, high frequency price indicators for April have indicated that food price pressures would persist. At the same time, the direct impact of the increases in domestic pump prices is feeding into core inflation prints and is expected to have intensified in April.
Effective from the fortnight beginning May 21, the RBI has also hiked the cash reserve ratio by 50 basis points, to 4.5% of net demand and time liabilities. This is expected to withdraw liquidity to the tune of Rs 87,000 crore from the system.
The other reason that seems to have prompted RBI’s move is the impending Federal Open Market Committee decision. US Federal Reserve has begun its rate hike cycle in March 2022 and is expected to hike the Federal Fund rate rather aggressively, by at least 50 basis points this week. If the RBI fails to act now, the spread in the sovereign bond yields of India and US will narrow resulting in accelerated foreign capital outflows. FPIs have already pulled out close to Rs 14,000 crore from Indian debt since February 2022.
The repo rate hike is however good news for savers who have been witnessing negative real interest rates on their investment. With returns on saving products such as bank and NBFC deposits and small saving schemes, fixed income investors will benefit. Those holding sovereign and corporate bonds will however see erosion in value as yields increase.
This will definitely impact consumer demand for houses, consumer durables and other discretionary items. With credit to the large companies and industries just beginning to revive, the rate hike could slow down credit growth to industry too. But over the longer-term, price stability will play an important role in supporting demand.