RBI hikes repo rate by 50 basis point to 5.4% as inflation is still ‘uncomfortable’
- Reserve Bank of India governor
Shaktikanta Dastoday announced the third interest rate hike, from 4.9% to 5.4%.
- The rate hike comes in lockstep with the
US Fed, which has so far announced a 225 basis points hike over the past few months.
- Governor Shaktikanta Das said that the rate hike should help keep the GDP growth expectation of 7.2% “anchored”.
This follows the 40 bps and 50 bps hikes announced so far in May and June respectively – taking the benchmark interest rate to 5.4%. The monetary policy committee has unanimously voted for this rate hike, Das said.
“The MPC noted that domestic economic activity is resilient and progressing broadly along the lines of the June resolution of the committee,” he said.
The governor, however, retained the GDP growth target of 7.2% for the current financial year. He also said that the consumer price index or CPI inflation is said to be at around 6.7% for the current year, as they closely watch the impact of possible unseasonal and excessive rainfall on food prices, even as global food prices have softened.
Market reaction remained positive, with both Nifty 50 and Sensex in the green as of 10:15 a.m. Bank Nifty was also up 0.5%.
‘Inflation is uncomfortable’
Das sounded a cautionary note about inflation, saying it is “uncomfortably higher” than the RBI’s 6% threshold. He announced that further rate hikes are also likely as inflation is expected to be above 6% throughout 2022.
Das also touched upon a point he had made during the second rate hike in June, saying, “The volatility in global financial markets is impinging upon domestic financial markets, including currency markets, thereby leading to imported inflation.”
On the other hand, Das sounded optimistic about India’s current account deficit, saying that he expects it to be within sustainable limits. Moderation in external debt to GDP ratio from 21.2% in March 2021 to 19.9% in March 2022 is another metric the RBI guv sounded happy about.
CPI inflation rate in India stood at 7.01% in June, and RBI’s target is to keep it between 2-6%. A further cool off in crude oil prices from the highs of $120 per barrel in June to $94 now – combined with a cool off in commodity and edible oil prices – should give Das some room to breathe and apply moderation in his rate hikes, if any, in the future.
Advertisement“The demand side indicators such as production of consumer durables, domestic passenger traffic, sale of passenger vehicles, and similar other indicators suggest an improvement in urban demand. Rural demand indicators however exhibited mixed signals,” Das said.
RBI’s still playing catch up with its contemporaries
So far, RBI’s rate hikes total to 140 basis points, bringing the repo rate back to the pre-pandemic levels at 5.4%. However, the quantum of hikes is still lower than its contemporaries – the US Fed and Bank of England, which have hiked rates by 225 bps and 175 bps respectively.
While the US Fed chair Jerome Powell’s commentary recently has been more dovish than hawkish, he has not ruled out future rate hikes even if it means the US plunges into a deeper recession. Inflation in the US is at 9.1%, far higher than the 2% target of the US Fed. That leaves a lot of room for Powell to hike rates further.
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