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The Reserve Bank of India (RBI) announced a third repo rate hike to 5.40%, up 50 basis points with immediate effect, the monetary policy committee (MPC) said on August 5, 2022. Amid heightened risk of recession, the RBI maintained its inflation projection at 6.7% in 2022-23 and real GDP growth projection at 7.2%.
The MPC decided to remain focused on withdrawal of accommodation to ensure inflation remains within the target going forward. The RBI aims to achieve the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.
The standing deposit facility (SDF) rate stood adjusted to 5.15% and the marginal standing facility (MSF) rate and the bank rate to 5.65%.
Global Sell Off
The quantitative tapering by The U.S. Federal Reserve this year has had a spillover effect across the globe leading the financial markets to experience a surge in volatility and large sell-offs. This spillover has been felt by the Indian economy as well, said the RBI.
The central bank specifically blamed the weakness in the Indian rupee to the rise in the U.S. dollar index (DXY), which soared to a two-decade high in July and appreciated by 8.0% against a basket of major currencies causing the Indian Rupee to depreciate by 4.7% during the current financial year till August 4.
Capital outflow and reserve losses have both contributed to uncertainty in the global economic and financial environment, which is already battling the impact of the persisting war in Europe that has pushed prices of commodities significantly higher aggressively fuelling inflation.
Home Turf Hit By Inflation
The RBI said the domestic economy was seeing some stability helped by the south west monsoon rains, industrial and services sector activity holding up, robust urban demand and increasing rural demand, moderate merchandise exports and robust non-oil and non-gold imports.
However, on the inflation front, CPI inflation persisted above the upper tolerance level of 6% for the sixth consecutive month in June. There has been some let-up in global commodity prices – particularly in prices of industrial metals – and some softening in global food prices leading to moderation in food inflation.
With inflation expected to remain above the upper threshold in Q2 and Q3, the MPC stressed that sustained high inflation could destabilize inflation expectations and harm growth in the medium term. The RBI continues to weigh the evolving geopolitical developments and the international commodity market dynamics as key determinants of how inflation will look like in the coming quarter.
Market Reaction
The market largely expected the RBI to increase the repo rate and both NIFTY 50 and BSE S&P Sensex rose marginally by 0.32% and by 0.37% respectively in the first hour of trade post the MPC’s announcement.
Upasna Bhardwaj, the chief economist at Kotak Mahindra Bank, said “given the increasing external sector imbalances and global uncertainties the need for frontloaded action was imperative and the Bank continues to see 5.75% repo rate by December 2022.”
Others like Niraj Kumar, the chief investment officer at Future Generali India Life Insurance believes India is close to the end of the rate hiking cycle given today’s rate action and with global data flow and commodity prices continuing to show signs of softening. “Overall, the undertone of the policy was reassuring with MPC reiterating its commitment to being supportive of growth recovery,” Kumar said in a press note.
Cautioning home loan borrowers, Kalpesh Dave, the head of corporate planning and strategy at Star Housing Finance, said with interest rates now back to pre-Covid levels and economy on a higher interest rate cycle, housing finance companies, non-banking financial companies and home loan customers should brace for higher borrowing costs on new credit lines. “It makes sense to switch to fixed rate offerings after evaluating the benefits that can be incurred,” Dave said.
To read about which home loan will suit your needs and your pocket the most, read our guide on Best Home Loans.
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Aashika JainEditor
Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.
