The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday, 8 June, unanimously voted to increase the benchmark policy rate by 50 basis points (bps), taking the repo rate to a two-year high of 4.90 percent.
Reacting to RBI’s decision, Aditi Nayar, the chief economist at ICRA Limited, said, “We had anticipated that the Monetary Policy Committee (MPC) would raise the repo rate by 40 bps in the June 2022 policy review, in line with the magnitude of the increase seen in May 2022. However, the MPC delivered a slightly more front-loaded rate hike of 50 bps.”
She added that this was “a clear attempt to prevent inflationary expectations from unhinging, in the context of inflation that may be global and supply-side in its origins, but is broad-basing and is massively higher than the upper tolerance of 6 percent,” Business Standard reported.
Meanwhile, the rate hike was also accompanied with a 100 bps upward revision in the MPC’s Consumer Price Index (CPI) inflation forecast for FY23 to 6.7 percent.
“This came with the clarification of an average crude oil price assumption of $105/barrel, and the caveat that the latest projection doesn’t take into account monetary policy action. Our CPI inflation forecast is similar at 6.5 percent with an upward bias, amidst a crude oil price range of $100-120/barrel for the Indian basket,” Nayar added.
Describing the monetary policy announcement as aggressive and stating that it moves beyond frontloading interest rate increases, HDFC Bank Chief Economist Abheek Barua said that the central bank seems far more concerned about inflation now, which is well reflected in the upward revision in its inflation forecast by 100 bps to 6.7 percent while remaining relatively more sanguine on growth impulses.
Existing Limits on Individual Housing Loans Increased
Further, RBI has also decided to increase the existing limits on individual housing loans issued by the cooperative banks.
Reacting to the increase, Dhruv Agarwala, Group CEO, Housing.com, PropTiger.com, and Makaan.com said:
"The RBI's announcement to increase the limit for individual housing loans by state and district cooperative banks by 100 percent is a positive move that will cushion some of the impact of the rate hike. Credit flow to the housing sector is also likely to improve with rural cooperative banks starting to finance residential projects."
Meanwhile, Madan Sabnavis, the chief economist at Bank of Baroda, was quoted as saying, “The matrix now is clear. Inflation will be higher than expected at 6.7 percent but the growth forecast has been retained at 7.2 percent. Inflation will be at 7.5 percent and 7.4 percent in the first two quarters followed by 6.2 per cent in the third. This means that there will be reasons for further increases in the repo rate and another 50-75 bps looks very much likely under these conditions with an upside to further increases.”
Further, Barclays India's Chief Economist Rahul Bajoria stated that the RBI revising up inflation forecasts but keeping the growth projection signals its intention to keep inflation at the centre of its decision-making, and desire to return to the pre-pandemic policy stance as soon as it can.
Accordingly, the brokerage expects the policy rate to reach 5.75 percent by December, up from its earlier forecast of 5.15 percent.
As per Bajoria, the RBI may raise the repo rate by 35 bps to 5.25 percent in the next meeting in August, unless there is a dramatic improvement in prices, which looks unlikely.
(With inputs from Business Standard.)