scorecardresearchRBI raises repo rate by 50 bps to 5.4%, back at pre-pandemic levels

RBI raises repo rate by 50 bps to 5.4%, back at pre-pandemic levels

Updated: 05 Aug 2022, 10:34 AM IST
TL;DR.

The Reserve Bank of India (RBI) raised the repo rate by 50 bps to5.40 percent on August 5 for the third consecutive time. Repo rate is now back to pre-pandemic levels, highest since August 2019.

RBI policy today

RBI policy today

The Reserve Bank of India (RBI) raised the repo rate by 50 bps to5.40 percent on August 5 for the third consecutive time and retained its stance of 'withdrawal of accommodation' to ensure that inflation remains under control. The Repo rate is now back to pre-pandemic levels, the highest since August 2019.

The RBI rate-setting committee was unanimous in its decision on lifting the rates as the current inflation remains above RBI's comfort zone.

The Reserve Bank's rate-setting panel - Monetary Policy Committee - started the meet on August 3 for three days to deliberate on the prevailing economic situation.

Bank rates and Marginal Standing Facility (MSF) rates were adjusted to 5.65 percent, and 5.15 percent, respectively.  RBI left the CRR untouched. Cash Reserve Ratio (CRR) is the deposit that banks are mandated to maintain by the RBI as reserves in the form of liquid cash.

The RBI Governor Shaktikanta Das, in its policy speech, said that the successive shocks to the global economy are taking a toll. IMF has also revised the global growth projection downwards as the Indian economy continues to grapple with high inflation.

Das noted that $13.3 billion has been the outflow from India in the current financial year so far. India is expected to be amongst the fastest growing economy in the world, he said, while adding that the current account deficit will remain within comfortable limits.

The RBI maintained FY23 GDP forecast at 7.2 percent.

The RBI retained the FY23 GDP growth forecast at 7.2 percent with Q1 (April-June) GDP growth forecast at 16.2 percent, Q2 (July-September) GDP growth forecast at 6.2 percent, Q3 (October-December) GDP growth forecast at 4.1 percent and Q4 (January-March '23) GDP growth forecast at 4 percent.

To cushion the impact of the Covid-induced lockdown, the central bank slashed the repo rate in March 2020 and maintained the status quo in the benchmark interest rate for almost two years. It first increased its key lending rate in two years since Covid in a surprise move on May 4, 2022.

Inflation

Retail inflation or the CPI inflation forecast for FY23 has also remained unchanged at 6.7 percent, with April-June inflation forecast at 7.5 percent, July-September forecast at 7.4 percent, October-December at 6.2 percent and January-March 2023 inflation forecast at 5.8 percent.

Das said that CPI is above comfortable levels. He added that the MPC is stressed that sustained high inflation could destabalise inflation expectations. Further, he said that volatility in global markets is leading to imported inflation.

Most experts expected a policy rate hike of 25-35 basis points to check high retail inflation. The central bank had already announced gradual withdrawing its accommodative monetary policy stance in the June policy decision. They predicted that the RBI would raise the benchmark rate to at least the pre-pandemic level and even further in later months.

The next meeting of the MPC is scheduled for October 2022.

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First Published: 05 Aug 2022, 10:09 AM IST