arrow-left

RBI hikes 35 bps to 6.25%, says farewell to hawkishness

  • India Infoline News Service
  • 07 Dec , 2022
  • 11:33 AM
With repo rates already at 5.90%, the RBI was under pressure to ensure that growth did not falter due to too much hawkishness. However, with inflation still in the range of 6% to 7%, the RBI rightly decided to find a compromise. The 35 bps rate hike gives out the right signal that the RBI is still serious about fighting inflation. At the same time, it also emits the first signal that its choice would now shift to nurturing GDP growth. In a way, that was a good choice with the Fed likely to announce its last policy for the Calendar Year 2022 on 14th December.

For the RBI, as Governor Das has consistently underlined, the policy choices represent the horns of a dilemma. It cannot afford to let its policy slip on inflation control since it has larger implications for demand, consumption and expectations. At the same time, the RBI cannot be seen to be diverging too much from the Fed in terms of monetary stance, as it could impact the colour of flows into India. Above all, the RBI also has the current account deficit and the rupee to worry about; and both have been very vulnerable in last one year.

RBI hikes repo rates by another 35 bps to 6.25%

This time around there was no element of surprise in the policy statement and the outcome was exactly what the markets had already anticipated. The markets had factored in 35 bps rate hike after indications from the Fed that the central bank of the world’s largest economy could go slow on rate hikes. Here are important points from the RBI policy statement.
  • The policy repo rate has been increased by 35 basis points from 5.90% to 6.25%. Repo rates are now a full 110 bps above the pre-COVID repo rate levels of 5.15% and inching towards the likely terminal rate range of 6.50% to 7.00%.
  • Consequently, the standing deposit facility (SDF), automatically stands increased to 6.00%; pegged 25 basis points below the repo rate. In April 2022, the SDF had replaced the erstwhile reverse repo rate mechanism.
  • The bank rate and the marginal standing facility (MSF) rate, pegged 25 bps above the repo rates, go up to 6.50%. With rapid transmission already evident in India, this hints at a further spike in borrowing costs; something evidenced in Q2FY23 results.
  • Inflation expectations for FY23 were retained at 6.7% but the GDP growth expectations have been further lowered by 20 bps to 6.80%. In the 30th September policy, the RBI had lowered the growth estimate from 7.20% to 7.00%; so it is 40 bps in two policies.
  • A total of 5 out of 6 members voted to hike repo rates by 35 basis points to 6.25%, with Dr. Jayant Varma the sole dissenting voice. Withdrawal of accommodation found 4 out of 6 votes in favour with Jayant Varma and Ashima Goyal opposing the resolution.
This looks a lot more like a market friendly monetary policy with a focus on what the markets want rather than purely from a regulatory perspective. Whether this sets the tone for the future, would also depend on the Fed policy announcement on 14th December.

Inflation retained at 6.7% for FY23, GDP growth lowered 20 bps

In nutshell, the expected inflation for FY23 has been retained at 6.7%, the GDP growth estimate for FY23 has been lowered by 20 bps to 6.80%. That makes it a 40 bps growth downgrade by the RBI in the last 2 policies. Here is what the RBI governor said about growth and inflation in his speech.
  • Why did the RBI not lower inflation estimates for FY23, despite sharply lower oil prices? According to the RBI governor, there are positives in the form of weak crude and sharply higher sowing acreage for the Rabi season. However, with a large trade deficit, imported inflation could offset most of the advantages.
  • The tone of the RBI governor in his speech was that the inflation problem was far from over. According to Das, most of the supply chain constraints still remain and the sticky nature of core inflation indicates that inflation could rear its head once again. That is something India must be prepared for.
  • Lastly, the RBI has underlined that despite cutting growth forecast for FY23 by 20 bps from 7% to 6.8%, one cannot miss out the resilience story in India. For instance, the Q2FY23 GDP growth at 6.3% was much higher than the most optimistic estimates on the street. While India may not have decoupled from global markets, its huge domestic market size makes it less vulnerable. Das underlined that even at 6.8% estimated GDP growth for FY23, India would outpace China by 300-400 bps and remain the fastest growing large economy in the world.
Key policy measures appended by the RBI

In last few years, RBI has used the policy statement to provide additional signals on the regulatory front. Here are 4 key announcements made as an addendum to the policy.
  • For SLR holdings, banks can hold 23% of NDTL in the HTM (held to maturity category) up to March 2023. This limit used to be 19.5% before. Now, the RBI has extended this limit to March 2024 to allow banks to better manage their investment portfolios.
  • UPI now dominates the volumes in terms of digital payments, even as NEFT continues to dominate the value sweepstakes. RBI will now introduce single-block and multiple-block debit functionality in UPI transactions for which NPCI will issue detailed instructions.
  • The Bharat Bill Payments System (BBPS) will be expanded to encompass all payments and collections under its ambit. However, BBPS cannot handle recurring transactions, so it is difficult for regular mandates. Now, BBPS will support recurring transactions too.
  • A new mechanism to allow resident Indians to hedge their gold risk in the global markets is being conceived. They can hedge this risk through stock exchanges located at the International Financial Services Centre (IFSC) to manage gold price risk more efficiently.
RBI has given a toppish message on rates indicating that the RBI may be approaching the terminal repo rate soon. We have to await the minutes on 21st December for greater clarity. The Fed policy on 14th December and the inflation number should set the tone for the next RBI policy scheduled between February 06th and February 08th 2023.

ad IconAd Image

Author


MORE ARTICLES BY NIRMAL JAIN


Article Image

In the current situation, only resolute bold measures taken quickly can save these nationalised banks from extinction. It is unorthodox to take up such sensitive reforms in an election year. But it could prove to be game changer, like unprecedented and unorthodox reforms in the form of demonetisation and GST.

  • March 09, 2018
  • 3:38 PM
  • less than a minute
Article Image

Market value of all the PSU banks today is less than book value, at around $70billion. If PSU banks had performed in line with the private sector banks, they would have been worth $250 billion. While statutory obligations for priority sector lending, SLR, CRR are all similar for public and private sector banks, PSU banks had natural advantage for having inherited a huge branch network, credibility of government ownership and dominant share of PSU enterprises' banking business.

  • July 12, 2017
  • 4:55 PM
  • less than a minute
Article Image

When two soldiers are martyred at the border, the whole nation rallies with them. When two hundred farmers commit suicide or die on the farms, you would hardly find a mention in social media. We should not forget that Kissan (farmer) is as important as Jawan (soldier) and we say in one breath Jai Jawan Jai Kissan. Today we need war cry not at the border but in the farm.

  • June 16, 2017
  • 5:02 PM
  • less than a minute
Article Image

I have never been as bullish on India for next ten years, as I am today. My optimism is based not only on a stable government moving firmly in the right direction but also on India’s unique position in the global economy at this point in time.

  • May 17, 2017
  • 5:06 PM
  • less than a minute

As expected, RBI hikes interest rate by 50 basis points

  • India Infoline News Service
  • 30 Sep , 2022
  • 10:34 AM
RBI has hiked repo rate today by 50 basis points to 5.9%. Standing Deposit Facility (SDF) rate and Marginal Standing Facility (MSF) rates have also been increased by 50 basis points. SDF now stands at 5.65%. MSF now stands at 6.15%. Repo rate is the rate at which RBI lends money to banks. Standing Deposit Facility is the rate at which banks can lend to RBI without the RBI have to give government securities as collateral to banks. MSF is the rate at which banks can borrow from RBI without having to pledge government securities as collateral. In the case of borrowing on repo rate, banks need to put government securities as collateral. The purpose of increasing these rates is to slow down demand in the economy so that inflation rate goes down. Increase in these rates will increase the cost of loans that banks give to businesses and individuals. This will bring down demand for interest sensitive consumption and investment, that are financed by loans. 

While announcing the interest rate hike, the RBI also lowered its GDP forecast for FY 23 to 7% from 7.2%. Interesting thing is that in spite of the third consecutive interet rate hike this year, RBI did not lower its inflation forecast for FY23. It maintained its inflation forecast for FY23 at 6.7%. This is an implicit acceptance by the central bank that successive interest rate hikes are not going to have any downward impact on inflation rate. The best that they can do is to prevent the inflation rate from accelerating further. But that objective will also not be achieved if commodity prices such as that of oil & gas rise because of supply side constraints. The present inflation is clearly a supply side driven one. Monetary policy as a tool for controlling inflation is effective when inflation is driven by demand side factors. It is not effective when inflation is driven by supply side factors.

One reason because of which RBI has to increase interest rate today is because of continued depreciation in Rupee against the Dollar. Currencies of countries whose interest rates are higher tend to appreciate against currencies of countries whose interest rate is lower. After the Federal Reserve increased its interest rate recently, US Dollar started appreciating against other currencies, such as Rupee. To check that appreciation, RBI had to increase interest rate today.

RBI has remained silent on what is the monetary policy transmission period it expects with regard to interest rate hikes of the past few months. Monetary policy transmission period is the period in which change in interest rate starts having an impact on economic activity and inflation. 

Key highlights of the RBI monetary policy

  • India Infoline News Service
  • 30 Sep , 2022
  • 12:33 PM
RBI Governor:
  • 2 shocks have impacted global markets, now we are facing the 3rd shock
  • RBI raises REPO Rate by 50 bps to 5.9% from 5.4%
  • SDF rate adjusts to 5.65%, Previously 5.15%
  • MSF rate at 6.15%, Previously 5.65%
  • Bank rates adjusts to 6.15% from 5.65%
  • RBI to remain focused on “withdrawal of accommodation” stance while supporting growth
 
On Indian economy:
 
  • Economic activity remains stable
  • RBI sees inflation elevated at 6% in 2H FY23
  • Real GDP growth 13.5%, above pre-pandemic levels
  • RBI retains India’s FY23 GDP growth at 7.2%. GDP Growth forecast for FY24 is 6.7%
  • India’s debt to GDP, net international investment position to GDP ratio and debt service ratio declined, imparts greater resilience from external shocks
  • Bank credit growth has accelerated to 14% against 7.9% a year ago
 
On GDP growth:
  • RBI lowers India’s FY23 Real GDP growth from 7.2% to 7%. Q2 at 6.3%, Q3 is project to be at 4.6%, Q4 at 4.6% while Q1 FY24 real GDP Growth is projected to be at 7.3%.
 
On Inflation:
  • RBI’s CPI inflation forecasted retained at 6.7% for FY23. Inflation for Q2 is projected at 7.1%, Q3 at 6.5%, Q4 is project to be at 5.8% with risk evenly balanced.
  • CPI remains elevated and above the upper tolerance band target. Recent correction in commodities including crude oil prices, if sustained, can ease pressure.
 
On Currency:
  • RBI remains watchful and focussed on maintaining stability of Indian Rupee.
  • US dollar appreciated by 14.5%, the INR depreciated in an orderly manner by 7.4%. INR fared much better compared to advanced currencies and its peers.
  • INR has fared much better than many global currencies.
  • RBI has no fixed exchange rate in mind
  • Adequacy of forex reserves to be kept in mind
 
On forex reserves:
  • Forex Reserve now stands at 537.5 Billion. 66% of the decline in reserve is due to valuation changes arising from appreciating USD and higher US bond Yields.
  • In view of moderation in surplus liquidity, RBI decided to merge 28 day VRRR with 14 day VRRR. Only 14 day VRRR auction will be conducted.
 
On CAD and FPI’s:
  • Current account deficit for 1st quarter of FY23 is pegged at 2.8% of GDP with trade deficit at 8.1% of GDP.
  • India’s import growth is decelerating compared to export growth.
  • FDI Improved to $18.9 Billion in April to July from $13.1 Billion last year.
  • FPI has returned with $7.5 Billion after an outflow of 9 consecutive months
  • India’s other external ratios have fared better than other developing countries
  • External debt to GDP is lowest amongst growing economies
  • Expected loss-based approach to be used for Banks
  • Framework for securitization for stressed assets to be proposed

RELATED BLOG POSTS

Image not found
  • 30 September, 2022 |
  • 11:51 AM

What does it mean?

ad IconAd Image