The Reserve Bank of India (RBI) announced increasing its lending rate by 50 basis points to 5.40 percent on Friday. RBI has increased the interest rate for a third consecutive time in a bid to tame soaring inflation which has exceeded the upper band of the central bank’s inflationary target this year.
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India’s June retail inflation, which RBI takes into consideration while setting the key lending rate, stood at 7 percent, crossing RBI’s 2-6 percent medium-term target. Inflation based on the Wholesale Price Index (WPI) has been coming in double-digits for 15 months consecutively. The wholesale inflation was 15.18 percent in June.
With a view to reign in out-of-hand prices, the monetary policy committee (MPC) raised the key lending rate or the repo rate by 50 basis points (bps) to 5.40 percent, the highest in three years.
The repo rate, or the short-term lending rate at which banks borrow, has just risen above the 5.15 percent pre-pandemic level.
All six members of the Monetary Policy Committee (MPC), including the chair– RBI Governor Shaktikanta Das, gave ‘yes’ to the policy rate hike in one voice.
Prices have not shown any signs so far of dropping, despite the RBI shocking markets with an unprecedented 40 bps interest rate increase in May and a 50 bps increase in June.
“The RBI’s 50-bp hike was largely in line with market expectations, divided between it and a 35-bp hike. With the RBI retaining its 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,” said Economist Aurodeep Nandi at Nomura. (Source: Reuters)
The central bank in April cut down the GDP growth outlook for 2022-23 to 7.2 percent from its earlier prediction of 7.8 percent. For the second quarter of FY23, the RBI sees the inflation rate coming at 7.1 percent, which can ease to 6.4 percent the following quarter. It is, however, expected to fall under the inflationary target band of 4% with ±2% at 5.8 percent in Q4.
The RBI governor said global crude oil prices have come down lately, however, they still are high and volatile. The supply-related issues are worrisome amid the grim global demand outlook.
“Taking into account these factors and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of USD 105 per barrel, the inflation projection is retained at 6.7 percent in 2022-23,” Das said.
The Governor stated that the rupee has fared well compared to the worldwide trend of capital flows into the dollar. He emphasized that enormous flows into dollar-denominated assets have had an impact on all currencies, developed and emerging alike.
Governor had previously said the RBI would do anything to support the rupee and control “jerky movements” of the currency. In July, Mr. Das had said ‘you buy an umbrella to use when it rains!’, indicating the apex bank is using foreign exchange reserves to handle currency volatility.
India still has the fourth-largest import cover in the world, according to the Governor, and the central bank wasn’t overly concerned.
RBI’s Repo Rate Hike Comes After BOE’s Announces Interest Rate Rise
The latest RBI action comes after the Bank of England increased its interest rate by 50 basis points, the biggest increase since 1995 to 1.75 percent. In a bid to tame soaring price rates, the BoE’s Monetary Policy Committee voted 8-1 for a half a hundred point rise in Bank Rate to a record 1.75% since 2008 from 1.25%.
The consumer price inflation had hit a four-decade high of 9.4% in June, almost five times the BOE’s inflation target of 2%. The British central bank has announced interest rates six times since December, but the one on Thursday was the largest since 1995.
Last month, the US Federal Reserve announced a second consecutive 0.75 percentage point hike, taking its benchmark borrowing rate to a range of 2.25-2.5 percent.