RBI hikes repo rate by 50 bps to 5.40% in its third hike in 4 months

The Monetary Policy Committee of the Reserve Bank of India unanimously decided on Friday to raise the repo rate by 50 basis points (bps) to 5.4 percent with immediate effect, focusing on the withdrawal of accommodation. It has also kept the inflation and GDP forecasts for the current fiscal year 2022-23 at 6.7% and 7.2%, respectively.

The key interest rate has been raised by 50 basis points.

The key repo rate has been raised by 50 basis points, the third increase in a row following a 40-bps hike in an off-cycle monetary policy review in May and a 50-bps hike in June. The repo rate has now surpassed the pre-pandemic level of 5.15 percent, reaching its highest level since August of this year.

The bank rate, standing deposit facility (SDF), and marginal standing facility (MSF) have all been raised by 50 basis points to 5.65%, 5.155%, and 5.655%, respectively.

“The RBI rate hike of 50 basis points is in line with our expectations,” said Srikanth Subramanian, CEO-Designate of Kotak Cherry. With Friday’s rate increase, we’ve returned to pre-pandemic levels of 5.40 per cent. It was imperative for the RBI to hike rates as it has a clear focus on getting inflation down to its ceiling of 6 per cent.’

The Inflation Forecast Is Maintained

The Reserve Bank of India maintained its inflation forecast for the current fiscal year 2022-23 at 6.7% on Friday. “The inflation projection is retained 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 evenly balanced,” assuming a normal monsoon in 2022 and an average crude oil price (Indian basket) of $105 per barrel. According to the monetary policy statement, CPI inflation is expected to be 5.0 percent in Q1:2023-24.

“Spillovers from geopolitical shocks are imparting considerable uncertainty to the inflation trajectory,” RBI Governor Shaktikanta Das said while presenting the monetary policy statement. Food and metal prices have recently dropped from their highs. International crude oil prices have fallen in recent weeks, but they remain elevated and volatile due to supply concerns, despite a weakening global demand outlook.”

Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat, said, “With inflation expected to be above 6 per cent for Q2 and Q3, we expect regular RBI interventions in the next two quarters – Q2 and Q3 of FY 23 – to ensure rupee stability. With inflation expected to go below 6 per cent in Q4 of FY23 and then to go down further in Q1 of FY24, we expect the RBI not to use rate hikes as a tool anymore in those quarters and move to liquidity management measures to ensure that the growth is not stiffled.”

GDP Forecast Retained

The RBI has also maintained its GDP forecast for FY23 at 7.2%. “The real GDP growth projection for 2022-23 is retained 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, and risks are broadly balanced,” according to the RBI. The real GDP growth rate for Q1:2023-24 is projected to be 6.7%.”

“Rural consumption is expected to benefit from improving agricultural prospects,” Das said. Demand for contact-intensive services, as well as improved business and consumer sentiment, should boost discretionary spending and urban consumption. The government’s capex push is expected to boost investment activity by improving bank credit and increasing capacity utilisation.”

However, he stated that elevated risks from protracted geopolitical tensions, an increase in global financial market volatility, and tightening global financial conditions continue to weigh heavily on the outlook.

Standalone Primary Dealer Announcements

Subject to prudential guidelines, the RBI decided to allow standalone primary dealers (SPDs) to offer all foreign exchange market-making facilities currently permitted to Category-I Authorised Dealers. It also allowed them to conduct transactions with non-residents and other market makers in the offshore rupee overnight indexed swap (OIS) market.

Code of Conduct in Outsourcing of Financial Services Soon

The RBI governor stated that a draught Master Direction on Managing Risks and Code of Conduct in Financial Services Outsourcing will be issued shortly for comments from stakeholders in order to harmonise and consolidate the existing guidelines.

The Bharat Bill Payment System now accepts cross-border payments.

The Bharat Bill Payment System (BBPS) is a platform for standardised bill payments that is interoperable. The RBI has now approved cross-border inward bill payments. This will enable non-resident Indians (NRIs) to pay utility, education, and other bills on behalf of their families in India. “This will be especially beneficial to senior citizens,” Das said.

Credit Information Companies are covered by the RBI’s Ombudsman Scheme.

Das said the Reserve Bank-Integrated Ombudsman Scheme (RB-IOS) has improved the customer grievance redress mechanism. The turnaround time of grievance redress under RB-IOS has declined considerably. “In order to make the RB-IOS more broad-based, it has been decided to include credit information companies (CICs) under the RB-IOS framework. This will provide a cost-free alternative redress mechanism for grievances against CICs… It has been decided to mandate the CICs to have their own internal ombudsman framework.”

Committee on MIBOR Benchmark

The RBI on Friday also proposed to set up a committee to study the need for transition to an alternative benchmark for MIBOR. The panel has been set up in view of the recent international efforts to develop alternative benchmark rates. “The Reserve Bank has been taking measures, from time to time, to develop the interest rate derivatives (IRD) market in India. Such measures have led to diversification of the participant base and increased use of IRD instruments, such as the Mumbai Interbank Outright Rate (MIBOR) overnight indexed swap (OIS) contracts,” Das said.