RBI hikes repo rate by 50 bps, taking it to a three-year high of 5.9% – Das says inflation at ‘alarmingly high levels’ across jurisdictions
- Reserve Bank of India governor Shaktikanta Das today announced the fourth interest rate hike, taking the repo rate to 5.9% from 5.4%.
- The rate hike comes in lockstep with the US Fed, which has so far announced a 300 basis points hike over the past few months.
- Making the announcement, Das said inflation remains at ‘alarmingly high levels’ due to the triple shock of Covid-19, Russia-Ukraine war and aggressive monetary policy action from central banks of advanced countries.
AdvertisementReserve Bank of India (RBI) governor Shaktikanta Das on Friday announced an interest rate increase of 50 basis points, the fourth hike since May this year, in a bid to tame inflation and ensure financial stability. This takes the repo rate to a three-year high of 5.9%. The SDF repo rate (standing deposit facility) is now at 5.65%.
This is RBI’s third consecutive 50 bps hike, taking the total hike to 190 bps – the central bank had raised the repo rate by 40 bps in May and 50 bps each in June and August.
Das said inflation remains at ‘alarmingly high levels’ due to the triple shock of Covid-19, Russia-Ukraine war and aggressive monetary policy action from central banks of advanced countries.
“The global economic outlook continues to be bleak. Financial conditions are tightening and recession fears are mounting. Inflation continues to persist at alarmingly high levels across jurisdictions. The enduring effects of the pandemic and the geopolitical conflict are manifesting in demand-supply mismatches of goods and services,” Das said.
The governor pegged the real GDP growth rate at 7% for the current financial year. He also said that the consumer price index or CPI inflation is said to be 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.
Das said CPI inflation is further projected to reduce to 5% by Q1 FY24, while saying “monetary policy should remain alert and nimble”.
Market reaction remained positive, with both the Nifty50 and the Sensex in the green as of 10:30 a.m. The Bank Nifty was also up 1%.
Stubborn inflation, strong US Dollar
CPI inflation surged back to June levels of 7% in August, after falling to 6.71% in July, and RBI’s target is to keep it between 2-6%. A further cooling off in crude oil prices from the June highs of $120 per barrel to $87 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.
Das also touched upon a point he had made during the second rate hike in June, saying, “In this milieu, nervous investor sentiments have triggered a flight to safety. The US Dollar has strengthened rapidly to a two-decade high. Several advanced and emerging market currencies are facing sharp depreciation pressures,” he added.
AdvertisementOn the other hand, Das sounded optimistic about India’s financial activity, and said that it remained stable.
“While real GDP growth in the first quarter this year turned out to be lower than our expectations, nonetheless it was 13.5%, and perhaps the highest among major global economies,” he added, saying that the government’s capex thrust, buoyant reservoir levels, and improvement in capacity utilisation, among other things, are expected to support demand and output in the second half of FY23.
RBI continues to play catch up with its contemporaries
So far, RBI’s rate hikes total to 190 basis points, taking the repo rate to a three-year high of 5.9%. However, the quantum of hikes is still lower than its contemporaries – the US Fed and Bank of England – which have hiked rates by 300 bps and 225 bps respectively.
US Fed chair Jerome Powell’s commentary has slanted more towards a hawkish stance recently, suggesting more rate hikes are in store. Inflation remains the Fed’s top focus, even if it has plunged the markets already and could lead the US into a recession.
AdvertisementInflation in the US is currently at 8.3%, down from 9.1%, but still much higher than the Fed’s 2% target. This gives Powell enough room to continue with his rate hikes.
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