Repo To Repair The Economy?
This morning I saw the Reserve Bank of India (RBI) announcement of a hike of 50 basis points in the repo rate from 4.4 per cent to 4.9 per cent. This is the prime key interest rate at which the RBI lends money to the banks.
The RBI's Monetary Policy Committee (MPC) voted unanimously to raise the repo rate and decided to remain focused on the withdrawal of its 'accommodative' stance. This is with an aim to bring inflation under the target levels of four to six per cent while continuing to push for growth.
The MPC, not surprisingly, has increased its Consumer Price Index (CPI), by 100 basis points to 6.7 per cent. The RBI Governor has said it would remain higher than six per cent till December 2022, mainly owing to elevated food prices.
The RBI, which was earlier confident of reining in inflation over the past few months, had external impacts like increasing crude oil prices, and supply costs due to the Russian - Ukraine war, etc. This deviation from its permitted range and actual numbers if it continues for three consecutive quarters would need the RBI to explain the failure formally to the government.
The RBI has now projected the CPI inflation for the first quarter of FY2023 at 7.5 per cent against 6.3 per cent earlier. For the second quarter, it is estimated at 7.4 per cent against the 5.8 per cent projected earlier. For the third and fourth quarters, it is projected at 6.2 per cent and 5.8 per cent.
Of course many central banks globally have made aggressive rate hikes to tackle the decades-high inflation, and the post-Covid economic dilemma, especially in the light of the continued geopolitical tensions, high crude oil prices and commodities, and continued Covid related supply chain issues.
Now the hope would be that the monsoon would be good, and would benefit better farm output in the season ahead. Until then the risks of increased power tariffs (as we have been seeing a spike in demand because of a severe summer), high costs of animal feed, spike in food inflation would steer the inflation numbers higher.
It is natural to wonder whether the banks would pass on the rate hike to their customers. The answer is a high probable “yes”. But will they also, raise savings deposit interest rates? Probably not at the same levels as their lending rates, if at all they raise them.
The banks, being in a cyclic business, need to shore up for higher risk provisioning, in case there is any further Industry slowdown. The advantage that the banks have in a fragmented debt market like India, is that they would still rule the roast in lending. If and when they do lend.
Highlights of the MPC announcement
Key lending rate (repo) raised by 50 basis points to 4.9 per cent ‒ the second increase in five weeks
The Repo rate still remains below the pre-pandemic level
Inflation projection for the current fiscal raised to 6.7 per cent from 5.7 per cent
GDP growth forecast retained at 7.2 per cent for the current financial year
Credit cards to be linked with UPI; RuPay credit cards to be linked first
Lending limits for housing loans by co-op banks doubled
Rural co-op banks permitted to lend to commercial Real Estate ‒ Residential Housing (CRE-RH) sector
Urban Co-op banks allowed to offer door-step banking
E-mandates on cards for recurring payments enhanced to Rs 15,000 from Rs 5,000
