India’s Reserve Bank likely to hike repo rate to 6% by 2022

The Reserve Bank of India is likely to raise its key policy rate by up to 60 basis points by the end of 2022 before pausing but the pace of rate hikes is likely to slow down, NDTV reports quoting analysts.

“We are retaining our view of a terminal policy rate of 6 per cent…We expect a 35 bps hike at the next meeting in September and a final 25 bps hike in December, before growth concerns and the cumulative rate hikes delivered thus far lead the MPC to shift into an extended pause,” Nomura economist Sonal Varma said in a note.

The RBI’s monetary policy committee (MPC) raised its benchmark repo rate by 50 basis points to 5.4% on Friday, the third hike in a row, to cool stubbornly high inflation that has remained above its tolerance band for six straight months.

The RBI has hiked the repo rate by an aggregate of 140 basis points since it started its rate hike cycle through an unscheduled meeting in May. It is scheduled to meet in September as well as in December.

Central banks typically raise the benchmark repo rate – the interest rate at which commercial banks borrow money by selling their securities to the Reserve Bank – to shrink money supply in the economy.

Lower interest rates make for easy borrowing and businesses typically borrow to invest in new economic activities. Therefore, more cash supply increases inflation because more money chases fewer goods, since money supply can be increased overnight, but not purchasable goods, which need considerable time to produce.

Kotak Mahindra Bank said it expects the repo rate to be raised to 5.75 per cent-6.00 per cent, and the RBI to continue with rate hikes as a line of defence, for rupee stability and against elevated inflation.

The increase in the repo rate has two broad implications. New borrowers and existing repo rate-linked long-term retail loans will get costlier. Since the interest rate at which banks borrow will now go up, retail loans such as personal loans, auto loan, home loan will get costlier. So, new borrowers should expect EMIs to go up.

On the flip side, bank depositors will get higher returns on their deposits depending on how banks pass on the new interest rate hike. These deposits include fixed deposits.

The Indian rupee has depreciated by 6.9 per cent so far in 2022 against the US dollar, and hit a record low of 80.0650 in July.

The RBI maintained its retail inflation forecast for the current financial year unchanged at 6.7 per cent, and Governor Shaktikanta Das highlighted concerns over elevated inflation.

Even though the annualised inflation reading eased to 7.01 per cent in June from an eight-year high of 7.79 per cent in April, it is expected to remain above the central bank’s tolerance range of 6.00 per cent for most of the financial year. The data for July is due on Friday.

Yes Bank said that it expects a 25 bps rate hike at each of the next two meetings, as slowing global growth leads to a softer pace of policy tightening.

As global prices soared, fanned by rising oil, India’s central bank first effected a 40-basis point hike at an unscheduled meet in May. It raised the repo rate again by 50 basis point in June.

The Reserve Bank Governor, Shaktikanta Das, on Friday said consumer price index (CPI) inflation remains “uncomfortably high” and is “expected to remain above 6%” The Reserve Bank kept the CPI forecast for FY23 unchanged at 6.7%.

India’s retail inflation eased for the second month in a row but only a tad to 7.01% in June from a year ago, official data on Tuesday showed. Consumer prices, which rose 7.04% in May, continued to breach the Reserve Bank of India’s upper limit of 6% for the sixth straight month.

About The Author

Leave a Reply

Your email address will not be published. Required fields are marked *