The MPC meeting is scheduled for June 8 and analysts expect it to again hike the repo rate by at least 25 bps.
The MPC meeting is scheduled for June 8 and analysts expect it to again hike the repo rate by at least 25 bps.
Home-, auto- and other loan EMIs likely to rise reserve Bank of India (RBI) extended its key interest rate 40 bps In an effort to tame May 4th in a surprising move inflation Which has remained well above target in recent months.
The hike in the repo rate – the rate at which the RBI lends to commercial banks – from a record low of 4% to 4.40% as of August 2018 is the first instance of the Monetary Policy Committee (MPC) headed by the RBI governor. Holding an unscheduled meeting to raise interest rates.
The RBI has increased the cash reserve ratio (CRR) by 50 basis points to 4.5%, allowing banks to park more money with the central bank and lend less to consumers. This will drain ₹87,000 crore of liquidity from the banking system, RBI Governor Shaktikanta Das said in a video address announcing the rate hike decision.
However, he did not mention anything about the reverse repo rate and hence it remains the same at 3.35%. The Fixed Deposit Facility rate now stands at 4.15% while the Marginal Standing Facility Rate and Bank Rate stands at 4.65%.
The MPC retained its accommodative monetary policy stance – meaning it could cut interest rates to support growth – at a time when inflation is alarmingly rising globally.
With continued inflationary pressures becoming more intense, especially on food, Mr Das said, there is a risk if prices remain at this level “for too long” and expectations go unchecked. “Inflation has to be contained for the Indian economy to remain determined towards sustainable and inclusive growth,” he said.
The rise in fuel and food prices, due to supply chain disruptions related to the war in Ukraine and the continuing pandemic, has remained above the RBI’s comfort zone of 2-6% for three consecutive months. Headline inflation rose to a 17-month high of 6.95% in March and could be above the target band in April as well.
The MPC meeting is scheduled for June 8 and analysts expect it to again hike the repo rate by at least 25 bps. “The MPC decided that the inflation outlook warrants an appropriate and timely response through firm and calibrated steps to ensure that the effects of the second round of supply-side shocks on the economy are contained and strengthen long-term inflation expectations. kept from.” Das said.
The Governor, however, said the monetary stance remains accommodative and the action will be calibrated. “In the MPC’s view, monetary policy response at this juncture will help maintain macro-financial stability amid increasing volatility in financial markets,” he said.
The move stunned the markets, pushing the benchmark Sensex down 1,474 points in intra-day trade and sending the yield on India’s benchmark 10-year bond to 7.38%. One basis point is one hundredth of a percentile.
Deloitte India economist Rumki Mazumdar said a rate hike was expected in June. “The surprising move by the RBI to raise policy rates a month ago shows that it does not want to wait and see but wants to act quickly before inflation derails the growth recovery. However, making borrowing costlier will hit consumers and businesses (especially MSMEs) and impact credit growth, which has been low since 2019. There will also be some restraint in economic activities. As the economy returns to normal, there is growing concern about demand rising faster than supply, leading to demand-inflation. In addition, global Inflation is also a concern, Higher commodity, edible oil, metal and fertilizer prices due to the Russia-Ukraine crisis are driving up production costs. Both cost-push and demand-pull inflation drivers indicate that the RBI will have to act on price pressure concerns.
The central bank reaffirmed its liberal stance in February – a move criticized by some economists as too benign on the risk of rising prices. RBI said last month that it would start prioritizing inflation over support growth.
“This is in line with the return of housing stance”, which was announced at the last MPC meeting in April, Mr Das said. RBI has cut the repo rate by 250 basis points from February 2019 to help revive the growth momentum. The Monetary Policy Committee has long taken a liberal stance to support growth.
In response to the pandemic, monetary policy had shifted gears in an over-adjustment mode, with a reduction in the policy repo rate by 75 bps on March 27, 2020, followed by a further reduction of 40 bps on May 22, 2020. .
In April, it raised its inflation forecast for the current fiscal year (2022-23) from 4.5% to 5.7% and said it would expect gross domestic product (GDP) growth during the year to 7.2, compared to the previous expectation of 7.8%. % is. , From 1 October 2019, all banks were mandated to lend only at an interest rate linked to an external benchmark, such as the RBI’s reported rate or treasury bill yield. As a result, transmission of monetary policy by banks has gained traction.
For two years, the RBI kept interest rates at a record low to support the economy. The six-member MPC last held an off-policy cycle meeting on May 22, 2020 to meet the demand Repo rate cut by 40 basis points At a historic low of 4% in the wake of the uncertainty surrounding the COVID-19 pandemic.
The rate hike has happened 11 times in a row, the last time being just a month ago, the RBI interest rate was at a record low of 4%.
Investors’ wealth decreased by ₹6.27 lakh crore
Investors became poorer by over ₹6.27 lakh crore on May 4 as markets plunged after the Reserve Bank of India (RBI) hiked the policy rate by 40 bps in a surprise move.
The 30-share BSE benchmark Sensex closed 1,306.96 points or 2.29% lower at 55,669.03. During the day, it closed down 1,474.39 points or 2.58% at 55,501.60. With the fall in equities, the market capitalization of BSE-listed firms declined by ₹6,27,359.72 crore to ₹2,59,60,852.44 crore.
Unmesh Kulkarni, managing director, senior advisory, said, “RBI surprised the markets with a 40 bps hike in the repo rate and 50 bps hike in the CRR in an off-cycle meeting by the MPC on Wednesday.” Julius Baer India.
Shrikant Chauhan, Head of Equity Research (Retail), Kotak Securities Ltd. said, “Ahead of the Fed meeting in the US, the Reserve Bank has created a stir in the Indian markets by suddenly increasing the interest rates. We saw a behind this. In the benchmark indices. sudden drop.” Bajaj Finance, Bajaj Finserv, Titan, IndusInd Bank, HDFC Bank, Dr Reddy’s and Maruti Sensex were the major losers from the pack.
In contrast, POWERGRID, NTPC and Kotak Mahindra Bank closed in the green. In the broader market, the BSE Midcap gauge fell 2.63% and the Smallcap index fell 2.11%.
Among the sectoral indices, BSE Consumer Durables was the biggest loser at 3.88%, followed by Realty (3.31%), Consumer Discretionary Goods and Services (3.01%), Healthcare (2.92%) and Telecom (2.73%).