The Reserve Bank of India (RBI) has hiked the repo rate by 50 basis points (bps) for the third straight time, taking the key lending rate to the pre-pandemic levels.

A 50-bps rate hike has become new normal among global central banks, said RBI Governor Shaktikanta Das in the post-policy press conference on Friday.

The most likely scenario is banks will pass on impact of repo rate hike to deposit rates. This is already happening and the trend will continue, Das added.

The six-member Monetary Policy Committee (MPC), led by the RBI Governor, has, in the last three tranches, upped the repo rate to 5.4%. 

Inflation forecast unchanged at 6.7% in FY23

The battle against inflationary pressures is far from over and the market expects more rate hikes to follow in succession. Repo is the rate at which the central bank lends short-term funds to banks. This has a spiralling effect on the banking system, pushing up lending and deposit rates. 

On inflation, Das said it’s primarily due to supply issues and imported inflation. Our monetary policy actions have not fueled domestic inflation, the RBI Governor added.

The RBI kept its inflation forecast unchanged at 6.7% for the current financial year.

Das, however, did not want to specify at what inflation level the MPC would pause on interest rates as the “situation is dynamic and very uncertain”.

GDP growth retained at 7.2%

On GDP growth, the RBI has also kept its projections unchanged at 7.2% for  2022-23.

The central bank in April slashed the GDP growth projection for 2022-23 to 7.2% from its earlier forecast of 7.8%.

Liquidity

There is some tightening of the liquidity since rising inflation has prompted the RBI to flush out the surplus in the banking system. “We have seen system liquidity tighten since the RBI started withdrawing excess liquidity, and system credit growth improved to 14%. With credit growth looking up, we believe the banks with a higher share of floating rates and a robust CASA-led deposit franchise should be placed well in this increasing interest rate environment,” said Axis Securities chief investment officer Naveen Kulkarni.

The RBI still feels that the overall liquidity is currently fairly high, about Rs 5 lakh-6 lakh crore. Normalising it will be a multi-year process. The process will spill over into next year also, Das said.

Jayanth R Varma was the lone member of the MPC to state reservations on the continuation of withdrawal of accommodative stance. 

The other five members of the panel, Shashanka Bhide, Ashima Goyal, Rajiv Ranjan, Michael Debabrata Patra and Das, voted to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

In March 2020, the RBI had cut the repo rate following the Covid-induced lockdown and continued to maintain the status quo in the benchmark interest rate for almost two years.

NRIs can pay electricity, other bills for families in India via BBPS

Non-resident Indians (NRIs) will soon be able to make utility, education and other bill payments on behalf of their families in India by using the Bharat Bill Payment System (BBPS). 

The Reserve Bank of India (RBI) on Friday proposed to enable BBPS for cross-border inward bill payments.

Credit bureaus

Customers of registered credit bureaus can file complaints directly with the Reserve Bank of India (RBI) for faster resolution of their credit scores and related complaints. 

Credit bureaus will be included under the RBI’s integrated ombudsman scheme. It will provide a redress mechanism to customers of the Credit  Information Companies (CICs), more commonly known as credit bureaus.

Industry reactions

Madan Sabnavis - Bank of Baroda Chief Economist

 “The RBI has clearly taken an aggressive position on inflation even though there is no change in the forecasts on both inflation and growth. The confidence in growth gives it a strong justification for attacking inflation in a big way. We may expect another 50 bps hike during the year in this situation as inflation in the next two quarters will remain above 6%. The RBI’s commentary on growth is also reassuring as growth seems to be on the stable path notwithstanding the disturbances in the global arena.

 We can expect liquidity to be managed evenly by the RBI through VRR and VRRR auctions to ensure there are no distortions in the market. Surplus in liquidity would be driven by how deposits and credit behave. As long as deposit growth is low, which is the case today and credit growth higher, there would be pressure on liquidity. Depending on the momentum in the economy there would be some volatility in liquidity which will then require intervention through VRR or even OMOs going ahead.”

Indranil Pan - Yes Bank Chief Economist

“As the trajectory of CPI inflation is pointing downwards, we expect the RBI to moderate the pace of hikes and raise the repo rate by 25-35 bps in September and 25 bps in December to 5.90-6.00% and pause thereafter to assess the growth-inflation dynamics.”

Goldman Sachs

"With the RBI appearing hawkish in its guidance and our forecast that India’s external balances will remain under pressure in 2022 given a) weaker global growth, b) relatively resilient domestic economic recovery and c) our commodities team’s forecast of higher oil prices by the end of the year, we retain our forecast of a 35bp hike in September followed by 25bp in December. 

We thus forecast a further cumulative 60bp repo rate hikes in 2022, with an additional 75bp repo rate hikes in 2023 which would take the repo rate to 6.75% by mid-2023, but acknowledge downside risks to the 2023 forecasts if commodity prices remain soft and global growth slows down materially next year."

Rajni Thakur - RBL Bank Chief Economist

 “The policy statement stayed away from any explicit forward guidance while remaining consistent on its assessment of growth and inflation trajectory for the economy. Any mention of nature and quantum of intervention, to manage currency faced with huge capital outflows didn’t find a place as well. Nevertheless, given the growth-inflation outlook, further hikes towards 6% terminal repo rate seem imminent, even though the pace of hike will likely be softer going ahead. Continued ‘focus on withdrawal’ indicates further drawdown of excess liquidity as well, in which case, monetary tightening is far from over yet.”

Siddhartha Sanyal - Bandhan Bank Chief Economist and Research Head

“While prices of some of the industrial commodities and food items softened in recent weeks, persisting supply chain disruptions, renewed geopolitical concerns and volatility in cross-currency movements prompt the MPC to stay focused on fighting inflationary pressures. A host of activity indicators – such as, industrial capacity utilisation, credit growth, government capex and PMIs – exhibited strength in recent months to offer comfort to policymakers on the growth front."