RBI Hikes Repo Rate By 50 Bps To 5.9% As Rupee Weakens, Inflation Persists

The Governor of Reserve Bank of India, Shaktikanta Das, today announced that the Monetary Policy Commitee (MPC) had decide to hike its policy repo rate by 50 basis points, taking the repo rate to 5.9% as the rupee reaches all time lows and inflation remains high.

Further, the MPC maintained its focus on withdrawing on its accommodative stance with a focus on growth.

Here are the main announcements by Das in this bi-monthly MPC announcement.

1. The interest rates

The policy repo rate now stands at 5.9%, which was hiked 50 basis points by the six-member MPC with a 5-1 majority. The rate hike is the second 50 basis point hike in a row and is largely in line with expectations according to a poll of economists that predicted a 35 to 50 basis point hike.

This takes the policy repo rate 190 basis points higher than the 4% mark where it stood in May, when this ongoing cycle of rate hikes first began.

A basis point is a hundredth of a percentage point.

The policy repo rate is the rate at which the RBI lends to the banking system on a short-term basis. It is vital, since several consumer facing products such as fixed deposits and home loan interest rates are linked to this policy rate. Its role in curbing inflation is by making lesser money chase goods, by making it more expensive to borrow (from the RBI for banks and consumers from banks) and by incentivising savings (through banks accounts and fixed deposits)

2. Growth and inflation

The RBI slashed its growth estimate for the ongoing fiscal year to 7%, down marginally from 7.2% in its previous address in August.

Das explained that the rationale behind this was strong domestic demand and fundamentals, including a good agricultural harvest and water reserves, an expectedly strong oncoming festive season and good industrial growth. The downside remains the external sector (import and export) which is prone to shock.

Das also stated that the consumer price index (CPI) inflation for this year is projected at 6.7%. This is above the RBI's tolerance band at 4%, with a 2% leeway on either side. "Global geopolitical developments are weighing heavily on the domestic inflation trajectory", he said. In August, India witnessed 7% inflation year-on-year, with high inflation rates persisting all of this fiscal year.

3. The exchange rate

A spate of rate hikes by the United State Federal Reserve System has led a global flight to safety to the US dollar, which has been the pushing factor behind it strengthening against currencies worldwide.

This has also hit the Indian rupee, as it continues to hit new lows, reaching a low as ₹81.66 for one dollar.

On average - that is against a basket of currencies - the dollar has appreciated 14.5% up to September 28, Das said. He added that the rupee has only depreciated 7.4% against the dollar, faring better than average and especially against several emerging market and Asian currencies.

He also aimed to temper market expectation on the exchange rate by stating that RBI has no fixed exchange rate in mind and would intervene in the forex market to curb volatility and direct expectation

4. Additional announcements

Das announced that it would be revisiting the criteria on the basis of which rural banks can provide internet banking services to facilitate digital payments.

Further, like online payment aggregators, Das announced that steps would be taken to bring offline payment aggregator under the purview of the RBI too.

5. Global rate hikes

The rate hikes are a global phonemenon by central banks around the world, which started off as an exercise to counteract the easy money policy of lower interest rates and excess liquidity to support their economies during the COVID-19 pandemic.

But a detrimental global spillover, especially in the advanced countries in Europe, started at the outbreak of the Russia-Ukraine conflict starting February 24, which accentuated the inflation problems in these countries. The conflict kicked off a vicious spiral of these central banks hiking their interest rates more aggressively than expected, which economists says will likely tip the advanced world into a recession.

His statement can be read here.

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