Last month, the six-member Monetary Policy Committee led by Governor Shaktikanta Das in an off-cycle monetary policy review had raised the repo rate or short term lending rate by 40 basis points to check spiralling inflation. Accordingly, the repo rate now stands at 4.40 per cent. The central bank had also hiked cash reserve ratio (CRR) by 50 basis to 4.50 per cent.
The repo rate is the rate at which the central bank lends money to commercial banks while the CRR is a certain minimum amount that banks have to deposit as reserves with the central bank.
Das had said the decision to hike the benchmark lending rate was taken with a view to tame inflation.
Inflation
The Consumer Price Index (CPI) based inflation, which RBI factors in while arriving at its monetary policy, is on the rise since October 2021. Retail inflation has remained above RBI’s upper tolerance level of 6 per cent since January. It had soared to an 8-year high of 7.79 per cent in April.
The government has tasked the central bank to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side.
A report by HDFC Bank Treasury Research Desk said RBI is expected to raise the policy rate by 25 bps while continuing to keep its stance and the CRR rate unchanged. “We tilt on the side of a 25 bps rate hike instead of 50 bps as we do not see a compelling case for a larger rate hike at this stage,” it said.
Indranil Pan, Chief Economist at Yes Bank, said the inflation surprise has brought to the fore the need for RBI to tighten the monetary policy.
“We see RBI extending its 40 bps repo hike of May with a 35 bps increase in June, followed by 25 bps each in August and September. By this time, we expect the global growth to have softened enough to pull down commodity prices and thus provide some comfort to the domestic inflation cycle too,” he said.
Saransh Trehan, Managing Director of Trehan Group, opined that RBI is likely to increase the key policy rates by up to 50 basis points.
Interest rates to go up
Banks will eventually pass it on to borrowers. However, given the prevailing historical low interest rates, it will not make significant impact on the demand, he said.
“We expect the policy rate to go up by 35-50 bps. RBI is, however, likely to continuously provide liquidity support through the LAF window to sustain the growth process. It would provide support to the government borrowing programme while controlling the hardening of yield through policy twists,” credit rating agency Infomerics said.
Anand Nevatia, Fund Manager at Trust Mutual Fund, said that with RBI now prioritising inflation targeting over growth, “we expect 35-50 bps rate hike along with hike in CRR to bring down liquidity”.
Last month, MPC raised the key policy rate (repo) by 40 basis points to 4.4 per cent to tame the rising inflation. It was the first rate hike after August 2018.
With an aim to cushion the impact of lockdown, RBI had slashed the repo rate by 75 basis points to 4.40 per cent in March 27, 2020 from 5.15 per cent. On May 22, 2020, RBI again cut the repo rate by 40 basis points and brought it down to 4 per cent. Thereafter, it maintained status-quo in the benchmark interest rate for almost two years before increasing it on May 4, 2022.