RBI Hikes Repo Rate by 25 bps to 6.5%, maintains ‘Withdrawal of Accommodation’

RBI Monetary Policy Meet: The Reserve Bank of India on Wednesday announced repo rate increase by 25 basis points to 6.5 %.

The decision was announced by RBI Governor Shaktikanta Das. MPC decision was by 4 out of 6 majority.

Amid volatile global developments, Indian economy remains resilient, Das said.

To remain focused on the withdrawal of accommodation. Monetary policy was confronted by unprecedented contraction of economic activity followed by a surge in global inflation, he said.

Das added that there is an urgent need to reinforce global co-operation, on the global ‘fault-lines’ emerging over last several years.

Dinesh Khara, Chairman, SBI, said, “RBI decision to hike the rate was in consonance with the expectations. Continuing strong job data from Fed has made monetary policy making a delicate balancing act for emerging economies central banks. Beyond the rate hike, there are a bouquet of policies that attend the micro structure of the market. The proposal to address the issue of penal charges on services will bring a rule based regulation. The initiatives on climate risk will improve compliance, capital budgeting and financial disclosures for banks. Providing further impetus to TReDS platform in terms of further augmentation of activities and allowing lending and borrowing government securities will add depth and aid price discoveries across markets.”

RBI MPC: Home Loan EMIs Set to Increase Post RBI Rate Hike

The decision of the six-member rate setting panel was announced by the Governor on Wednesday.

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said, “The MPC delivers a hike in line with our expectations given the need to anchor inflationary expectations. Further the reinforcement of need for action as inflation remains above medium term target of 4% signals the MPCs focus on inflation. Going ahead as inflation begins to moderate we expect real rates to reach near pre pandemic soon and hence the need for incremental rate hikes remain limited. We expect a prolonged pause on rates with a likely shift in stance in the coming April policy.”

With retail inflation showing signs of moderation and remaining below the RBI’s 6% upper tolerance level, and projected slowdown in GDP growth in the next fiscal starting April, experts were of the opinion that the central bank may only opt for a 25 basis points hike in the key interest rate.

Another opinion was that the RBI may press the pause button on rate hike itself.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers, said that the 25 basis points rate hike has been in line with the consensus expectations.

“We, however, felt the possibility of a rate pause this time around was at least 50%. On the inflation front, the major softening in India post April 2022 was there main reason for us to expect a standstill in this policy,” Hajra said.

Hajra added that the RBI seems to have been more bothered about the high and sticky core inflation for more than a year.

More importantly, the continued rate hikes by the Bank of England, the ECB, and the US Federal Reserves and the implications of these in the foreign exchange market influenced the decision of the RBI to go for another rate hike.

“Unless there is an unexpected flare in inflation, we would expect the RBI to maintain unchanged policy rate for the remainder of 2023. This would be positive both for the debt and equity markets,” Hajra added.

Meanwhile, the stock market opened higher on Wednesday, as investors expected a smaller interest rate hike by the RBI, while equities benefited from a broader sentiment after markets perceived comments from Federal Reserve Chair Jerome Powell to be dovish.

The Nifty 50 index was up 0.2% at 17,757.10, while the S&P BSE Sensex rose 0.15% to 60,376.17, as of 09.16 am.

It was expected that the RBI is likely to raise rates by 25 basis points (bps), to mark the final increase in its current tightening cycle, and then pause for the rest of the year, a Reuters poll showed, as retail inflation finally came within the central bank’s tolerance band of 2%-6% in the last two months of 2022.

Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund,  said that the policy action and guidance are along expected lines as the rapidly evolving external dynamics and the still elevated core inflation was expected to constrain any possibility of a specific forward guidance.

“We expect that this hike would be last in this cycle, with incremental actions to modulate excess liquidity. The lag effect of earlier actions and the cumulative monetary and liquidity tightening should enable policy rates to stay on hold incrementally. The FY24 GDP estimates which are in alignment with the Budget numbers probably remains on the higher side that could be re assessed as we move forward,” Radhakrishnan added.

The RBI had raised the key lending rate by 35 basis points in December, after three straight 50 bps hikes, and had said its fight against inflation was not over yet.

Fed’s Powell said on Tuesday disinflation has started and that he expects significant declines in inflation this year, raising hopes of less aggressive rate hikes in the future.

Wall Street closed higher overnight, while MSCI’s gauge of the broader index of Asia-Pacific shares outside Japan was up 0.75%. [MKTS/GLOB]

RBI Governor Shaktikanta Das-headed Monetary Policy Committee (MPC) started its three-day meeting on Monday amid expectations of a smaller 25 basis points rate increase or a pause on the rate hiking spree that started in May last year to check inflation.

In its December monetary policy review, the central bank raised the key benchmark interest rate (repo) by 35 basis points (bps) after delivering three back-to-back increases of 50 bps.

Since May last year, the RBI has increased the short-term lending rate by 225 basis points to contain inflation, mostly driven by external factors, especially global supply chain disruption following the Russia-Ukraine war outbreak.

The RBI has been tasked to ensure that retail inflation remains at 4 per cent with a margin of 2 per cent. However, it failed to keep the inflation rate below six per cent for three consecutive quarters beginning January 2022.

However, the retail inflation based on the Consumer Price Index (CPI) has shown signs of moderation in November and December as it fell below the RBI’s upper tolerance level of 6 per cent.

The MPC consists of three RBI officials and three external members appointed by the central government.

The external members are Shashanka Bhide (Honorary Senior Advisor, National Council of Applied Economic Research, Delhi); Ashima Goyal (Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai); and Jayanth R Varma (Professor, Indian Institute of Management, Ahmedabad).

Apart from the Governor, the RBI officials on the panel are Rajiv Ranjan (Executive Director) and Michael Debabrata Patra (Deputy Governor).

(With inputs from agencies)

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