RBI Raises Repo Rate by 50 bps to 5.40% – Highest Since August 2019

The RBI has hiked the rate for the third time since the beginning of the current financial year 2022-23.

RBI Governor Shaktikanta Das 

(Photo: Altered by The Quint)

The Reserve Bank of India (RBI) on Friday, 5 August, raised its policy repo rate by 50 basis points to 5.40 percent, taking the rate back to its pre-pandemic levels.

RBI Governor Shaktikanta Das announced the decisions taken at the Monetary Policy Committee (MPC) meeting, which began at 10 am on Wednesday, 3 August 2022.

Das said that the "unacceptably high" inflation trending around 7 percent mark led the RBI to hike rates by an aggressive 0.50 percent on Friday. "Inflation still remains at uncomfortably or unacceptably high levels and therefore, monetary policy has to act," he told reporters.

The RBI has hiked its lending rates for the third time since the beginning of the current financial year 2022-23, in a bid to bring down inflation from above the upper threshold of the central bank's target since January.

The RBI earlier said that it was removing policies that were introduced during the pandemic for support.

Here are the key highlights from the RBI Governor's address on Friday:

• Das said that the real GDP growth projection for 2022-23 was retained at 7.2 percent with Q1- 16.2%, Q2- 6.2%, Q3 -4.1% and Q4- 4% with risks broadly balanced. The real GDP growth for Q1 2023-24 is projected at 6.7%.

• He further added that edible oil prices were likely to soften further.

• Consumer price inflation remains uncomfortably high and inflation expected to remain above 6 pc.

• Domestic economic activity showing signs of broadening, while rural demand shows mix trend.

• Bank credit growth has accelerated 14 pc as against 5.5 pc year ago.

• MPC decides to focus on withdrawal of accommodative policy stance to check inflation.

• Weighted Average Call Rate has firmed up; interest rates on T-Bills, commercial papers and certificates of deposit have also moved higher since April.

• Surplus liquidity in banking system has come down from Rs. 6.7 lakh crore in April-May to 3.8 lakh crore in June-July this year.

• Depreciation of the rupee is more due to appreciation of the US dollar than weaknesses in macroeconomic fundamentals of Indian economy.

• Net FDI inflows at $ 13.6 billion in Q1 of this financial year, compared to $ 11.6 billion in Q1 of last year.

India Won't Be Impacted by Developments in Taiwan: RBI Guv

The governor later said that India is unlikely to be impacted by any adverse developments in Taiwan. Das noted Taiwan accounts for only 0.7 percent of India's overall trade and the capital flows from the island are also not very high.

"So, therefore India is not really going to be impacted with regard to what's happening or what is likely to happen in Taiwan," he said.

Monetary Policy Statement from June

In June, the MPC unanimously decided on increasing the policy repo rate by 50 basis points to a two-year high of 4.90 percent.

The RBI governor had indicated that inflation was likely to remain above 6 percent in the first three quarters of the current fiscal year, but added that the Indian economy remained resilient, and the central bank would continue to support growth.

He, however, had cautioned that there were risks from the ongoing Russia-Ukraine war.

Meanwhile, in July, the Indian rupee fell to an all-time low of a touch over 80 against the dollar, prompting the RBI to use foreign reserves to stop further damage.

'RBI Expected To Continue With Its Rate Hikes': Abheek Barua, Executive Vice President, HDFC Bank

"We expect the RBI to continue with its rate hikes in the upcoming policies taking rates up to 5.75 percent by the end of the year," said Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank.

"The bond market rally seen over the last few days is likely to reverse and we expect the 10-year paper to trade closer to 7.3-7.4 percent by the end of the quarter as markets reprice in RBI action and the supply of both SDL and central government bonds this year," he added.