RBI bites the bullet, hikes repo rate

Unprecedented Move

- Standing deposit facility rate at 4.15%

- Marginal standing facility rate & bank rate at 4.65%

- Inflation remained over RBI's upper tolerance band of 6% for 3rd straight mth

- CPI inflation at 7%

- MPC expects inflation to rule at elevated levels

- Higher inflation warranting resolute and calibrated steps to anchor inflation expectations and contain second-round effects

- 9 out of the 12 food subgroups registered increase in inflation

- High frequency price indicators for April indicate persistence of food price pressures

ICRA chief economist Aditi Nair said: "Today's surprise repo rate and CRR hikes are very well timed, as our own CPI inflation projection for April 2022 is an eye-watering 7.4%. By advancing the rate decision by approximately one month, the MPC has focused on preventing inflationary expectations from unanchoring in an increasingly uncertain environment. The Committee has displayed its nimble-footedness and clearly completed the pivot back to inflation management."

Mumbai: Ahead of the Fed meeting in the US, the RBI increased its key policy, repo rate by 40 basis points (bps) to 4.40 per cent with immediate effect today i.e. May 4, 2022.

The standing deposit facility rate is now at 4.15 per cent, while the marginal standing facility rate and bank rate stand at 4.65 per cent. The RBI also hiked the cash reserve ratio (CRR) by 50 basis points to 4.5 per cent effective May 21.

US Fed is also likely to hike its key policy rates when it announces its stance later this evening. Is the RBI's action being seen as a pre-emptive measure?

In fact, an indication to this effect was already given by him while addressing the media post MPC review meet on April 8. The MPC held an off-cycle meeting on May 2 & May 4 to reassess the evolving inflation-growth dynamics and the impact of the developments after the MPC meeting of April 6-8.

Addressing virtually, the RBI Governor Shaktikanta Das said that the Monetary Policy Committee (MPC) in an off-cycle meet unanimously voted to hike rates. The RBI on Wednesday hiked rates for the first time since August 1, 2018.

"The MPC also decided to remain accommodative, while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth," Das said.

"The situation is dynamic and fast-changing and our actions have to be tailored accordingly," Das reiterates Europe and export ban by key producers. "The jump in fertiliser prices and other input costs has a direct impact on food prices in India. The sharp acceleration in headline CPI inflation in March 2022 to 7 per cent was propelled in particular by food inflation, Das said.

"Nine out of the 12 food subgroups registered an increase in inflation in the month of March. High frequency price indicators for April indicate the persistence of food price pressures."

The MPC believes the core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from the prices of essential medicines. Headline retail inflation in India rose to a 17-month high in March led by a sharper than expected spike in prices of food and manufactured goods, official data showed.

"It has now remained over the RBI's upper tolerance band of 6% for the third straight month. The MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second-round effects, Das said. The RBI in its April monetary policy had kept its benchmark lending rate at a record low, keeping the repo rate unchanged at four per cent.

"Interest rate hike has been aimed at strengthening, consolidating medium-term economic growth prospects. Policy decisions taken today have been aimed at containing inflation spikes and re-anchoring inflation expectations," Das said.

"RBI will ensure that there will be adequate liquidity in the system to meet the productive requirements of the economy in support of credit offtake growth," he said. The next meeting of the MPC is scheduled between June 6 & 8.

Commenting on it, ICRA chief economist Aditi Nair said: "Today's surprise repo rate and CRR hikes are very well timed, as our own CPI inflation projection for April 2022 is an eye-watering 7.4 per cent. By advancing the rate decision by approximately one month, the MPC has focused on preventing inflationary expectations from unanchoring in an increasingly uncertain environment. The Committee has displayed its nimble-footedness and clearly completed the pivot back to inflation management."

If the US Fed's decision tonight is more hawkish than expected, then the 10-year Gsec yield could test 7.5 per cent as early as Thursday; this is the cap that we had foreseen for H1 FY2023.

As of now, we see a higher base softening the May 2022 CPI inflation print considerably, although it will likely remain above 6.0 per cent. While a back-to-back hike in the June 2022 policy is not yet certain, we do foresee an additional 35-60 bps of rate hikes in the remainder of H1 FY2023. If a de-escalation in geopolitical tensions cools commodity prices, then we expect a pause to reassess the impact on growth, followed by another 25-50 bps of rate hikes in CY2023, she added.

Interest rate hike has been aimed at strengthening, consolidating medium-term economic growth prospects. Policy decisions taken today have been aimed at containing inflation spikes and re-anchoring inflation expectations

- Shaktikanta Das, RBI Governor