RBI Hikes Repo By 35 Bps In A Sign Of Slowing Rate Hikes

The Governor of the Reserve Bank of India (RBI) - Shaktikanta Das on Wednesday announced that the central bank was hiking the policy repo rate by 35 basis points, or 0.35 percentage point, to 6.25% in a sign of slowing interest rate hikes.

But the RBI has not put an end date to rate hikes, stating that it was not ruling out further monetary policy intervention to get inflation under control and to sustain growth. Officially, during the pandemic, the RBI had adopted an 'accommodative' stance. The governor said that the RBI was moving towards withdrawal of accommodation to keep inflation within target and to support growth.

However, market expectations had priced in this hike as market estimates show, with Das stating this in his address, quipping that this was one of the few instances where market expectations and policy actions were perfectly aligned.

This announcement came as part of the bi-monthly meeting of the six-member Monetary Policy Committee (MPC) that votes on key monetary policy decisions.

The repo rate is the rate at which banks borrow from the RBI on a short-term basis. The repo rate is also uniquely placed in India lending system as it serves as a benchmark for several policy-linked products, primarily home loans, and these rate hikes would be passed on to the consumer to make them costlier. But this also means that saving instruments like fixed deposits would get more lucrative.

This is the RBI's fifth policy rate hike since the upward policy action trajectory starting in May, when a first surprise rate hike took place. Another one took place in June, then a third one in August followed by a rate hike in September. Except the one in May, that was of 40 basis points, all the other announcements hiked the repo rate by 50 basis points. A basis point in a hundredth of a percentage point.

The current bout of inflation is a byproduct of two-years of easy money that governments adopted to support the public during the disruptions caused by the COVID-19 pandemic. But Russia's military action in Ukraine made the situation more dire, especially in Europe. Therefore, central banks around the world are hiking their interest rates in momentum as the problems being faced globally are largely common.

Growth updates

The RBI has estimated that the Indian economy will grow 6.8% this financial year. This is a 0.2 percentage point downward revision compared to its estimates in September.

However, the governor was quick to reiterate on how marginal the change is and that in a worldwide scenario where several economies are expected to fall into recession, India is estimated to be the world's fastest growing major economy.

He said that the RBI based these estimates on stronger consumer sentiments and agricultural sector, expected capital expenditure by the government but cloudy macroeconomic condition abroad that will weigh on India's exports.

Also Read: IMF Follows RBI, World Bank In Cutting India's Growth Forecasts For FY23

Inflation estimates

Core inflation - or inflation excluding food and fuel - remains elevated and sticky, Das said, which remains a primary risk.

Abroad, while commodity prices and oil prices have corrected downward, Das emphasised on how uncertain these markets look. Therefore, assuming crude oil at $100 a barrel, inflation is projected at 6.7% for the ongoing financial year.

This is higher than the tolerance bracket that the RBI is permitted under its inflation targetting regime, where it needs to keep inflation at 4% with a tolerance band of two percentage points in either direction (that's 2% to 6%).

In a meeting on November 3, it is reported that the MPC met for a day to finalise a letter to send the central government as it failed to meet its inflation target for a significant period of time. This letter is mandated by the inflation targeting agreement between the RBI and the central government through the Ministry of Finance, though its contents are not yet public.

Other announcements

The RBI announced that the hugely popular Unified Payments Interface (UPI) would soon support 'Single-Block-Multiple-Debits', a mechanism that would let bank account holders block a sum in their accounts and authorise multiple future payments from that.

"This would be helpful for hotel bookings, purchase of securities in the secondary capital market as also purchase of government securities using the RBI's Retail Direct scheme, e-commerce transactions etc. This will build higher degree of trust in transactions as merchants will be assured of timely payments, whilethe funds remain in the customer's account till actual delivery of goods or services", the RBI said.

The scope of Bharat BillPay, the overarching payments platform of the NPCI, would also be enhanced to allow all payments and collection, including in-bound cross-border payments.

More detailed instructions would be released by the National Payments Corporation of India (who maintains the backbone of the UPI platform) separately.

In another announcement, resident Indians would be permitted to hedge their gold price risks in India through the International Financial Services Centre (IFSC). It is a special business zone in Gandhinagar with unique regulation to permit it to integrate more closely with global markets.

The announcement and the address can be read here.