RBI Monetary Policy Highlights: Reserve Bank of India’s Monetary Policy Committee (MPC) decided to hike the Policy Repo Rate by 50 basis points to 4.9% in its June meeting. RBI Governor Das said that MPC members voted unanimously to hike rates and decided to remain focused on a withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth. MPC noted that inflation is likely to remain elevated for the first three quarters of the current financial year and sees inflation for the year at 6.7%. Real GDP growth rate for the year has been retained at 7.2%. RBI Governor Das said that the war in Europe is lingering and the world is facing new challenges which have accentuated supply chain disruptions. “Indian economy is resilient with strong macroeconomic buffers. Inflation is primarily attributed to supply shocks linked to war,” Shaktikanta Das said.
As the inflation beast continues to bite into economic growth, the Reserve Bank of India’s monetary policy committee unanimously decided to tame this ‘steeply’ rising inflation by raising interest rates 50 basis points. Experts see 75-100 basis points rate hike by the end of current year, with the quantum of hikes in the upcoming August MPC meeting. Read more here
“To knock high inflation out of the park, central banks are having to step out of the crease and come out swinging with tight monetary policy. Today’s hike by 50 basis points on the top of an inter-meeting 40-basis-point hike in May is reflective of inflation elbowing its way to the top of the RBI’s priority list and it belatedly looking to catch up with the curve. RBI's upward revision of the inflation forecast for FY 2023 to 6.7% from 5.7% in April was also in line with our expectations, but still lower than our forecast of 7.2%. So we believe that we are still far from the finishing line and that more front loaded rate hikes are on the offing.”
~ Aurodeep Nandi, India Economist, Nomura
In a second round of policy rate hike in two months, the RBI's monetary policy committee (MPC) has unanimously voted to raise repo rates by 50 basis points, taking it to 4.9 per cent. From hiking repo rates to raising inflation projections, here are key takeaways from RBI's monetary policy announcement. Read here
“The bond markets and equity markets reacted well to the MPC outcome being relieved that the MPC did not sound more hawkish than most expectations. The absence of a CRR hike also was a relief. Stock prices of rate-sensitive sectors including Auto, Banks, Finance, Durables, and Realty have reacted well to the MPC outcome due to the above. However, this up-move may need more triggers to continue. While a revisit of the pre-Covid repo rate of 5.15% over the next 1-2 meets is a given (vs 4.90% currently), most economists expect this to go above 5.15%. A lot in this regard will depend on how soon the inflation peaks out and begins to fall and when do the global Central Banks feel that they are done with the rate hikes for now.”
~ Dhiraj Relli, MD & CEO, HDFC Securities
Progress towards tokenization is satisfactory, Deputy governor Rabi Sankar said. The central bank's deadline for card tokenisation is June 30.
Central Bank's digital currency to be introduced this year, RBI said today. The introduction of the same will be gradual.
India is better performing economy among the other EMEs, Das said. The economy is on a recovery path as seen in improvement in factors such as rural, urban demand, and capacity utilisation, he added.
“The stance continues to be focussed on withdrawal of accommodation. The triple whammy of commodity-price shocks, supply-chain shocks and resilient growth, has shifted the reaction function in favor of inflation containment. The reaction function is now evolving with fluid macro realities. The inflation prints of next two quarters are likely to exceed 7%, which could pressure the RBI into acting sooner rather than later,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services. “FY23 could thus further see rates going up by 75 bps+, with the RBI now showing its intent to keep real rates neutral or above to quickly reach pre-Covid levels. Our Taylor’s estimate shows a max tightening of policy rate by 6% by FY23, of which liquidity tightening to 2% of NDTL is tantamount to another estimated 25bps of effective rate hike,” she added.
“The RBI revised up its inflation forecasts, but kept its growth projections. This signals its intention to keep inflation at the centre of its decision making, and desire to return to the pre-COVID policy stance as soon as it can. We now expect the policy rate to reach 5.75% by December, from 5.15% earlier.”
– Rahul Bajoria, MD & Chief India Economist, Barclays
“The 50bps rate hike in policy repo rate is in line with our expectations of RBI remaining front-loaded on rate hikes, after un-anchoring markets’ policy expectation in Apr/May. The stance continues to be focussed on withdrawal of accommodation. The triple whammy of commodity-price shocks, supply-chain shocks and resilient growth, has shifted the reaction function in favor of inflation containment. The reaction function is now evolving with fluid macro realities. The inflation prints of next two quarters are likely to exceed 7%, which could pressure the RBI into acting sooner rather than later.”
– Madhavi Arora, Lead Economist, Emkay Global Financial Services
RBI Governor Shaktikanta Das said that the RBI and MPC retain 4% inflation target (+/- 2%). Currently, inflation is well above the tolerance band.
Asked about the breach in inflation target of 6%, according to RBI-government framework, Governor Shaktikanta Das said RBI will deal with the situation as and when situation arises. He noted that these are extremely uncertain conditions, and hence extremely uncertain outlook. It is not possible to provide forward guidance, Das said.
RBI remains accommodative but is focusing on withdrawal of accommodation – RBI Governor Shaktikanta Das.
'In terms of rates, RBI is still below the pre-pandemic level and in liquidity terms, we are above pre-pandemic level- this is what we mean when we say we remain accommodative,' Das said.
75 per cent increase in inflation projections attributed to food inflation. RBI has raised FY 2023 inflation projections to 6.7% : Governor Das.
Media interaction on RBI’s Monetary Policy with Goveror Shaktikanta Das begins.
“While further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9% remaining below the pre-pandemic level, the comment on the orderly completion of the government borrowing programme has served to cool the 10-year G-sec yield. We foresee further repo hikes of 35 bps and 25 bps, respectively, in the next two policies. However, the upmarch in the yields will now be somewhat shallower than our earlier expectations.”
~Aditi Nayar, Chief Economist, ICRA
“Inflation risks flagged in the April and May resolutions of the MPC have materialised. The projections indicate that inflation is likely to remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23. Considerable uncertainty surrounds the inflation trajectory due to global growth risks and geopolitical tensions,” Governor Shaktikanta Das said.
“Post the off-cycle announcement of a rate hike in May 2022, paving the way for a series of rate hikes in the following meetings, the RBI increased the repo rate by 50bps. The MPC has decided to focus on calibrated withdrawal of accommodation while supporting growth. May 2022 witnessed pro-active measures by the central government in the form of excise duty cut on petrol and diesel, a ban on wheat export, and other similar measures easing domestic inflationary pressures. However, keeping in view the ongoing geopolitical tensions, rising crude oil prices, and global inflationary input cost pressures, the regulator has increased its inflation estimate for FY23 to 6.7% vs 5.7% earlier. RBI has retained its growth estimates at 7.2%. We believe the market had already discounted a rate hike of 40-50bps, and the key monitorable was a commentary on inflation. We may witness another rate hike, probably of a similar quantum, in the next monetary policy to manage inflationary pressures,” said Naveen Kulkarni, Chief Investment Officer, Axis Securities.
“The inflation has been above the RBI's target range of 2-6% since the beginning of the year. With the ongoing Ukraine war and the COVID issues in China, the supply chain disruptions continue to affect global inflation. So, a rate hike of 30-50bps was expected by the RBI. The RBI has revised the inflation for FY23 to 6.7%, so inflation will continue to hurt the consumer pockets and company bottom-line for the coming quarters. We may see the food inflation coming down if the expectation of a normal monsoon this season turns out to be true. CRR was expected to be raised, but it seems RBI has decided to maintain the liquidity with banks for now.”
~ Raghvendra Nath, Managing Director – Ladderup Wealth Management
“The tense global geopolitical situation and the consequent elevated commodity prices impart considerable uncertainty to the domestic inflation outlook,” Das said.
“We expect 35 bps repo rate hike in the August policy to 5.25% and repo rate at 5.75% by end-FY2023. Along with pushing the repo rate to above the pre-pandemic level, a 35 bps hike would also signal a gradual normalization in the policy actions while being adequately hawkish. We also expect another 50 bps hike in CRR to 5% by end-FY2023 to move the liquidity conditions towards the pre-pandemic levels.”
~Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities
“The June policy was a continuation of the off-cycle policy with the focus remaining squarely on inflation. The RBI’s decision of hiking repo rate by 50 bps as well as increasing inflation estimate by 100 bps were in line with market expectations. The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to marginally positive real policy rate.”
~Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities
“The faster pace of monetary policy normalisation undertaken by systemic advanced economies (AEs) is leading to heightened volatility in global financial markets. This is reflected in sharp corrections in major equity markets, sizeable swings in sovereign bond yields, US dollar appreciation, capital outflows from EMEs and even from some AEs,” said RBI Governor Das.
“RBI's projections of GDP growth rate of 7.2% and inflation of 6.7% for FY23 reflect a realistic monetary policy. The higher inflation projection indicates that the central bank recognises the seriousness of inflation and the 50 bp repo rate hike is a message that they are determined to anchor inflation expectations. The Governor's remark that 'the economy remains resilient and recovery has gathered momentum' is bullish from the market perspective. The bond market's positive response with bond yields rising stems from the absence of CRR hike,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
India's recovery proceeding is at pace offering space for orderly policy shift. While we will continuously assess evolving situation to tailor our response, our actions must demonstrate commitment to keep inflation and inflationary expectations under check. Therefore monitoring and assessing inflation pressures and balancing risks to growth, will be crucial for judging appropriate path.' Shaktikanta Das
The standing deposit facility (SDF) rate stands adjusted to 4.65 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 5.15 per cent.
“The MPC also decided to remain focused on the withdrawal of accommodation to ensure,” the MPC statement said. The MPC was earlier focused on accommodation while still remaining accommodative.
No CRR hike has been announced by the RBI today. The CRR remains at 4.5%.
With the assumption of a normal monsoon in 2022 and an average crude oil price (Indian basket) of $105 per barrel, inflation is now projected at 6.7 per cent in 2022-23.
“Overall system liquidity remains in large surplus, with the average daily absorption under the LAF moderating to Rs 5.5 lakh crore during May 4 – May 31 from Rs 7.4 lakh crore during April 8 – May 3, 2022 in consonance with the policy of gradual withdrawal of accommodation,” said RBI Governor Das.
RBI has raised housing loan limits for co-operative banks by 100 per cent.
“India's recovery proceeding. Our actions must demonstrate the commitment to keep inflation and expectations in check,” Das said. He added that the MPC decision is to maintain price stability.
RBI raises limit of e-mandates to Rs 15000 from Rs 5000.
“The 50 bps repo rate hike comes on the back of persistence of elevated inflation and the continued upside risks. Given that inflation is expected to remain above 6% through 3QFY23, RBI had to frontload its actions. We continue to see another 60-85 bps hike in rest of FY23 to manage inflationary expectations,” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
Linking of RuPay credit cards to UPI will now be allowed. RBI said that this will increase the convenience for users and enhance the scope of digital payments.
RBI permit rural rural cooperative banks to extend finance to commercial real estate ie residential housing projects, Das said.
As on June 3, 2022, India's forex reserves stand at $601.1 billion, RBI Governor Das said.
'India's banking system remains strong. Bank credit has improved recently.' – Governor Das
RBI will ensure availability of adequate liquidity, RBI Governor Das said. And central bank will ensure orderly completion of government's borrowing program, Das said.
“Indian Rupee performing much better than EME peers,” Das said. He added that the Indian banking system remains strong as reflected by key indicators like profitability and provisions.
“We are monitoring G-sec markets very closely and necessary steps will be taken as and when required,” the RBI governor said.
In FY 2023, Inflation for Q1, Q2, Q3 and Q4 is expected to be 7.5%, 7.4%, 6.2% and 5.8% respectively, with risks evenly balanced. It does not take into account RBI's policy rate hike of 50 bps on Wednesday.
Inflation projections for FY 2023 raised to 6.7%.
Upside risks to inflation remain due to commodity price hike globally, elevated crude prices internationally, poultry feeds prices, and high tomato prices.
Inflation is projected at 6.7% for the current fiscal year. RBI Governor said that Q1 inflation is expected to be at 7.5% while 7.4% in Q2. In Q3 inflation is seen at 6.2% before falling to 5.8% in Q4. 75% of the increase in inflation is attributed to food group.
Surge in headline inflation seen across categories. Global geopolitical situation remains fluid and commodity markets on the edge, rendering heightened uncertainties to domestic conditions.
Real GDP growth for FY 2022-2023 is retained at 7.2%, RBI governor Das said. GDP growth for Q1 is expected at 16.2%, for Q2 at 6.2%, Q3 at 4.1% and Q4 at 4%, Das added.
Read GDP growth for the current year has been retained at 7.2%. RBI believes Q1 will see GDP grow at 16.2% while Q2 GDP growth is expected to be at 6.2%, Q3 is seen at 4.1% and Q4 GDP numbers are expected to be at 4%.
The rebound in contact-intensive activities in urban areas to rebound, Das said. Business sentiments have remained high, according to early estimates, however global supply chain crisis remain a risk, he added.
RBI says surveys suggest improvement in consumer confidence in the year ahead.