India’s RBI raises interest rates for the third time this year – Forbes Advisor

The Reserve Bank of India (RBI) has announced a third hike in the repo rate to 5.40%, up 50 basis points with immediate effect, the Monetary Policy Committee (MPC) said on August 5, 2022. In a 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 has decided to remain focused on withdrawing accommodation to ensure inflation remains on target going forward. The RBI aims to achieve the medium-term consumer price index (CPI) inflation target of 4% within a range of +/- 2%, while sustaining growth.

The rate of the permanent deposit facility (SDF) remained adjusted at 5.15% and the rate of the permanent marginal facility (MSF) and the bank rate at 5.65%.

Global Clearance

The quantitative cut by the US Federal Reserve this year had a ripple effect across the globe, causing financial markets to experience a spike in volatility and sell-off. This spillover has also been felt by the Indian economy, the RBI said.

The central bank specifically blamed the weakness of the Indian rupee on the rise in the US dollar index (DXY), which hit a two-decade high in July and appreciated 8.0% from a basket of major currencies, leading to a depreciation of the Indian rupee. 4.7% in the current fiscal year to August 4.

Capital outflows and loss of reserves have both contributed to uncertainty in the global economic and financial environment, which is already battling the impact of the lingering war in Europe which has pushed commodity prices higher. significant, aggressively fueling inflation.

The lawn of the house affected by inflation

The RBI said the national economy was enjoying some stability, helped by southwest monsoon rains, continued industrial and service sector activity, robust urban demand and growing rural demand, exports moderate commodities and robust non-oil and non-gold imports.

However, on the inflation front, CPI inflation remained above the upper tolerance level of 6% for the sixth consecutive month in June. There has been some slowdown in global commodity prices – especially industrial metal prices – and some softening in global food prices, leading to a moderation in food inflation.

While inflation is expected to remain above the upper threshold in the second and third quarters, the MPC pointed out that sustained high inflation could destabilize inflation expectations and hurt medium-term growth. The RBI continues to see evolving geopolitical developments and international commodity market dynamics as key determinants of inflation developments over the next quarter.

Market reaction

The market was widely expecting the RBI to raise the repo rate and the NIFTY 50 and BSE S&P Sensex edged up 0.32% and 0.37% respectively in the first hour of trading. negotiation after the announcement of the MPC.

Upasna Bhardwaj, Chief Economist of Kotak Mahindra Bank, said that “Given growing external sector imbalances and global uncertainties, the need for early action was imperative and the Bank continues to see a repo rate of 5 .75% by December 2022″.

Others, like Niraj Kumar, chief investment officer at Future Generali India Life Insurance, believe that India is close to the end of the rate hike cycle given today’s rate action and the flow global data and commodity prices which continue to show signs of slowing. “Overall, the tone of the policy was reassuring, with MPC reiterating its commitment to supporting the resumption of growth,” Kumar said in a press note.

Warning home loan borrowers, Kalpesh Dave, head of corporate planning and strategy at Star Housing Finance, said that with interest rates now back to pre-Covid levels and an economy on a higher interest rate cycle, housing finance companies, non-bank financial companies and home loan customers should prepare for higher borrowing costs on new lines of credit. “It makes sense to switch to fixed rate offerings after weighing the benefits that may come with it,” Dave said.

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