Repo rate increased by 50 bp to 5.40%

RBI MPC Monetary Policy Review Announcement Live Updates: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday issued the repo rate by means of 50 basis points (bps) until 5.40 percent effective immediately, announced RBI Governor Shaktikanta Das.

It is the third rate hike by the central bank this fiscal year. Before that, the RBI had increased the repo rate – by 40 fps in an off-cycle meeting in May and 50 fps in June. The market experts expected the MPC to increase the repo rate by . would raise minimum 35 basis points (bps) in this meeting.

The retail inflation or consumer price index (CPI), which the RBI takes into account when considering the benchmark loan rate, was 7.01 percent in June. Retail inflation has remained above the central bank’s comfort level of 6 percent since January this year.

In his speech, Das said the MPC vote was unanimous and that the MPC has decided to continue to focus on withdrawing its accommodative stance to control inflation. In addition, he announced that the revolving deposit facility (SDF) rate is adjusted to 5.15 percent and the marginal standing facility (MSF) rate and the Bank Rate to 5.65 percent.

In today’s speech, Das said India’s economy is struggling with high inflation and added that India has experienced capital outflows of $13.3 billion in recent months.

He noted that the financial sector remains well capitalized and India’s forex reserves provide insurance against global spillovers.

Speaking of growth, Das said the real one GDP growth projection for 2022-23 is maintained at 7.2 percent with Q1 at 16.2 percent, Q2 at 6.2 percent, Q3 at 4.1 percent and Q4 at 4.0 percent with risks broadly balanced. However, he warned that there are risks from the ongoing war between Russia and Ukraine.

Speaking of inflation, the RBI governor said that: retail inflation remains uncomfortably high, noting that inflation is expected to remain above 6 percent. He said the inflation projection is: maintained at 6.7 percent in 2022-23, with Q2 at 7.1 percent; Q3 at 6.4 percent; and Q4 at 5.8 percent, and risks are balanced, assuming a normal monsoon in 2022 and an average crude oil price (Indian basket) of US$105 a barrel. CPI inflation for the first quarter of 2023-2024 is projected at 5.0 percent.

How economists and market experts reacted:

  • Adhil Shetty, CEO at said: “The rise in the repo rate combined with inflation will hit new and existing borrowers hard. An increase of 140 basis points in recent months means that borrowers who paid about 6.8-7 percent interest are now 8.2 -8.4 percent will pay. This means that even for a 20-year loan, the amount of interest to be repaid is greater than the principal. If the EMI remains constant, the maturity of a loan with a maturity of 20 years increase by as much as 8 years Since most lenders would not approve this increase in maturity it is a given that EMIs would increase It is now essential to have a repayment plan as EMI alone is a very would mean high interest outflows.”
  • DRE Reddy, CEO and Managing Partner at CRCL LLP said: “The RBI today increased the repo rate by a further 50bp to 5.40% with immediate effect. With this move, the stage is set for a return to pre-COVID levels with an end to the easy money era. The chances of India entering a recession are absolutely zero. This will bring the final rate to 5.90 percent by the end of FY23. A normal monsoon, a good harvest year, a decrease in household inflation and a de-escalation of tensions between Russia and Ukraine will help keep the price of crude oil under control.”
  • Ravi Modani, Founder and CEO at 121 Finance said: “Policy announcement is at the top of expected lines, reflecting the RBI’s continued focus on maintaining the balance between growth and stability. We are currently in a situation where the Indian economy faces a significant challenge, in particular due to global macro-monetary policy and political developments. Any drop in demand due to higher borrowing costs should be offset by rural demand resulting from a very good monsoon. At the same time, this could impact second-quarter earnings for most companies. However, this is a very prudent decision to navigate this phase of global uncertainties with extreme caution and optimism, stemming from declining inflation and the preservation of the rupee.

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