The Reserve Bank of India (RBI) Governor on Wednesday announced that the Monetary Policy Committee voted unanimously to hike the benchmark interest rate by 50 bps with immediate effect. The RBI also left its FY23 GDP growth forecast unchanged at 7.2%.
The policy repo rate now stands at 4.90%, still below its pre-pandemic level. Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rates have been raised by 50 bps. SDF rate stands adjusted to 4.65%, MSF rate adjusted to 5.15%.
On the inflation front, the RBI revised its projection to 6.7% from the earlier estimate of 5.7% as the protracted nature of the Russia-Ukraine war puts pressure on commodity prices globally.
The RBI also proposed to allow the linking of credit cards to the UPI platform, Governor Das said on Wednesday as he announced a rate hike. To begin with, the Rupay credit cards will be linked to the UPI platform, which will provide additional convenience to the users and enhance the scope of digital payments, Das said.
In order to deepen credit flow to the housing sector, Das said that the cooperative banks will now be able to lend more for home loans. This will ensure better credit flow in the residential housing sector.
This hike comes on the back of a 40 basis points increase in repo rate which was announced in an off-cycle policy move in May. The RBI governor outlined that the off-cycle move was necessitated as it didn't want to shock the markets with a higher rate increase.
An ET poll suggested the policy repo rate could be increased by 25-50 basis points with nearly half the 23 market participants forecasting a 50-basis-point, or half-a-percentage point, increase. The others said the policy rate could increase between 25 and 40 basis points.
In April, during the first policy review of the current fiscal, the RBI had clearly enunciated that it will prioritise fighting inflation. India's retail inflation print climbed to an 8-year-high of 7.8% in April. Along with the wholesale prices at a three-decade high of 15%, the fears of retail inflation spiraling up have only compounded. Inflation fears have been stoked by the uncertain nature of the Russia-Ukraine war.
The hike in repo was more or less given as the RBI Governor Shaktikanta Das had said in a media interview that the raise in June would be a "no-brainer."
Growth concerns
The recent slip in India's economic growth in the fourth quarter of the last fiscal makes RBI's task even trickier.
High inflation poses a challenge to India's economic recovery as it directly chips away at the household budgets. The World Bank slashed India's economic growth to 7.5% from the earlier estimate of 8% due to rising concerns about high inflation, supply-side disruptions and geopolitical tensions.