PMIs to rise as RBI raises repo rate by 40 basis points

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The MPC is scheduled to meet on June 8 and analysts expect it to raise the repo rate again by at least 25 basis points

The MPC is scheduled to meet on June 8 and analysts expect it to raise the repo rate again by at least 25 basis points

PMIs for home, auto and other loans are likely to rise after the Reserve Bank of India (RBI) lowered interest rates last 4 months.

The increase in the repo rate – the rate at which the RBI lends to commercial banks – from a record low of 4% to 4.40% is the first since August 2018 and the first instance by the RBI’s Governor-led Monetary Policy Committee (MPC) . Holding an unscheduled meeting to raise interest rates.

The RBI is also raising the cash reserve ratio (CRR) by 50 basis points to 4.5%, which now obliges banks to park more money with the central bank and leave them less for lending to consumers. This would drain £87,000m of liquidity from the banking system, RBI Governor Shakkanta Das said in a video speech announcing the rate hike decision.

However, he didn’t mention anything about the reverse repo rate and hence it remains unchanged at 3.35%. The standing deposit rate is now 4.15%, while the standing marginal facility rate and bank rate are 4.65%.

The MPC maintained its accommodative monetary stance – meaning it can cut interest rates to support growth – at a time when global inflation is rising at an alarming rate.

Persistent inflationary pressures are becoming more acute, particularly on food, Mr Das said, adding that there is a risk if prices stay at these levels “too long” and expectations get off the rails. “Inflation must be tamed to resolutely keep the Indian economy on its path towards sustainable and inclusive growth,” he said.

Fuel and food price increases, exacerbated by the war in Ukraine and ongoing pandemic-related supply chain disruptions, have been above the RBI comfort zone of 2-6% for three straight months. Headline inflation rose to a 17-month high of 6.95% in March and could also stay above the target range in April.

The MPC is scheduled to meet on June 8 and analysts expect it to raise the repo rate again by at least 25 basis points. “The MPC ruled that the inflation outlook warrants an appropriate and timely response through decisive and calibrated steps to ensure that the second-round effects of supply-side shocks on the economy are contained and long-term inflation expectations remain firmly anchored,” Mr Das said .

However, the governor added that monetary stance remained accommodative and measures would remain calibrated. “In the MPC’s view, a monetary policy response at this point would help maintain macro-financial stability amid rising volatility in financial markets,” he added.

The move surprised markets, dragging benchmark Sensex down 1,474 points in intraday trade and sending the yield on India’s benchmark 10-year bond down to 7.38%. A basis point is one hundredth of a percentage point.

Deloitte India economist Rumki Majumdar said the rate hike is expected in June. “The RBI’s surprise move to raise interest rates a month early suggests it is planning not to sit and watch but act quickly before inflation derails the growth recovery. However, rising borrowing costs will impact consumers and businesses (particularly MSMEs) and hurt credit growth, which has been low since 2019. Economic activity is also likely to hold back somewhat.” As the economy normalizes, there are growing concerns that demand is growing faster than supply, which could lead to demand-pull inflation. Global inflation is also a concern. High raw material, cooking oil, metal and fertilizer prices due to the Russia-Ukraine crisis increase production costs. Both cost- and demand-driven inflation drivers suggest the RBI needs to respond to concerns about price pressures.

The central bank reiterated its accommodative stance in February – a move some economists have criticized as too benign given the risk of rising prices. The RBI said last month that it would start prioritizing inflation over supporting growth.

“This is squarely in line with the stance on deprivation of shelter” announced at the last MPC meeting in April, Mr Das said. The RBI has cut the repo rate by 250 basis points since February 2019 in a bid to revive growth momentum. The Monetary Policy Committee has maintained a long-term accommodative stance to support growth.

In response to the pandemic, monetary policy had switched to a highly accommodative mode with a 75 basis point cut in the policy rate on March 27, 2020, followed by a further 40 basis point cut on May 22, 2020.

In April, it raised its inflation forecast to 5.7% for the current fiscal year (2022-23) from 4.5% and said it sees gross domestic product (GDP) growth over the year of 7.2% from an earlier one Expectation of 7.8%. . From 1 October 2019, all banks were required to only lend at a rate linked to an external benchmark such as the RBI’s reporting rate or Treasury bond yields. As a result, banks’ monetary policy transmission has gained traction.

For two years, the RBI kept interest rates at record lows to prop up the economy. The six-member MPC last held an out-of-cycle meeting on May 22, 2020 to spur demand by cutting the repo rate by 40 basis points to an all-time low of 4% to shed uncertainty surrounding the COVID-19 19 pandemic to overcome.

The rate hike comes after 11 consecutive hikes, most recently just a month ago when the RBI held interest rates at a record low of 4%.

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